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OUTLINES   OF   ECONOMICS 


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OUTLINES  OF  ECONOMICS 

(REVISED   EDITION) 


RICHARD   T.  JELY,    PH.D.,  LL.D. 

PROFESSOR  OF  POLITICAL  ECONOMY  IN  THE  UNIVERSITY  OF  WISCONSIN 


REVISED    AND    ENLARGED    BY 
THE   AUTHOR 

AND 

THOMAS   S.   ADAMS,   PH.D. 

PROFESSOR  OF  POLITICAL   ECONOMY  IN   THE  UNIVERSITY 
OF   WISCONSIN 

MAX   O.   LORENZ,    PH.D. 

ASSISTANT  PROFESSOR  OF  POLITICAL  ECONOMY  IN  THE  UNIVERSITY 

OF  WISCONSIN;   DEPUTY  COMMISSIONER   IN  THE   WISCONSIN 

BUREAU  OF  LABOR  AND   INDUSTRIAL  STATISTICS 

ALLYN   A.  YOUNG,    PH.D. 

PROFESSOR  OF  ECONOMICS  IN  LELAND  STANFORD  JUNIOR 
UNIVERSITY 


THE   MACMILLAN   COMPANY 
1909 

All  rights  reserved 


COPYRIGHT,  1893, 
BY  HUNT  &  EATON. 

COPYRIGHT,  1908, 
BY  THE  MACMILLAN   COMPANY. 


First  published  elsewhere.  Reprinted  May,  1900;  July,  October, 
1901;  August,  1903;  July,  September,  1904;  July,  1905;  January, 
August,  1906;  July,  1907;  April,  1908. 

New  edition,  revised  and  enlarged,  September,  October,  1908; 
January,  August,  1909. 


Xoriuooti 

J.  8.  Cashing  Co.  —  Berwick  &  Smith  Co. 
Norwood,  Mass.,  U.S.A. 


PREFACE 

SINCE  the  first  edition  of  the  Outlines  of  Economics  was  pub- 
lished fifteen  years  ago,  there  has  been  considerable  progress  in 
economic  discussion.  In  this  revision  an  attempt  has  been  made 
to  include  so  much  of  the  new  thought  as  seems  to  have  established 
itself.  No  chapters  remain  unaltered,  most  of  them  have  been 
entirely  rewritten,  and  some  new  ones  have  been  added.  But  the 
plan  of  the  former  edition  has  been  retained.  This  book  differs 
from  the  Elementary  Principles  of  Economics,  published  in  1904 
by  Ely  and  Wicker,  in  that  it  is  a  more  advanced  treatise,  and  in- 
tended primarily  for  college  and  university  use;  whereas  the  latter, 
although  used  in  a  number  of  higher  institutions,  is  intended  pri- 
marily for  high  schools. 

Four  persons  have  taken  part  in  this  revision,  but  a  free  inter- 
change of  criticism  has,  it  is  hoped,  resulted  in  a  unified  product. 

Numerous  passages,  amounting  in  the  aggregate  to  many  pages, 
have  been  printed  in  smaller  type.  Such  are  the  passages  which, 
either  from  their  greater  difficulty  or  from  their  subsidiary  char- 
acter, may  best  be  omitted  by  a  teacher  pressed  for  time.  More- 
over, for  classes  in  which  the  time  limits  are  too  narrow  to  permit 
careful  study  of  the  whole  text,  it  may  be  found  expedient  to  omit 
Book  III,  on  Public  Finance ;  while,  on  the  other  hand,  some 
teachers  may  wish  to  take  this  Book  up  for  independent  study. 

Considerable  attention  has  been  given  to  the  questions  at  the 
close  of  each  chapter,  and  an  endeavor  has  been  made  to  frame 
these  so  as  to  require  a  mastery  of  principles  to  answer  them. 
Perusal  of  the  text  alone  will  not  enable  one  to  answer  them  all. 
In  some  cases  it  will  be  necessary  to  use  the  references  to  literature 
given  at  the  close  of  chapters.  There  are  also  cases  in  which  the 
correct  answer  must  be  a  matter  open  to  differences  of  opinion. 
It  is  hoped  and  believed  that  the  questions  will  give  rise  to  fruitful 
class  discussions. 


VI  PREFACE 

The  aim  of  the  authors  has  been  to  cover  the  entire  field  of  eco- 
nomics, feeling  that  in  this  way  they  best  serve  the  purposes  of 
those  students  who  are  going  to  carry  their  studies  further  as  well 
as  those  whose  systematic  school  study  of  economics  will  end  with 
the  present  treatise. 

At  certain  points  in  the  discussion  of  distribution,  use  has  been 
made  of  the  so-called  "productivity  theory."  In  order  that  there 
may  be  no  misapprehension,  it  may  be  well  to  say  here,  what  is 
repeated  in  the  text,  that  in  our  view  this  theory  has  little  or  no 
ethical  significance,  and  that  its  principal  value  is  as  an  expeditious 
method  of  approaching  the  supply  and  demand  theory,  with  which 
it  is  in  complete  harmony.  When  properly  handled,  it  has  the 
pedagogical  virtue  of  leading  the  student  directly  to  a  study  of  the 
innumerable  forces  which  condition  supply  and  demand.  But  to 
regard  the  productivity  theory  as  an  end,  is  to  mistake  the  problem 
for  its  solution;  and  to  pass  from  this  theory  lightly  to  the  imme- 
diate solution  of  those  problems  which  the  theory  of  distribution 
is  designed  to  explain,  is  to  offer,  in  place  of  scientific  explanation, 
a  mass  of  pretentious  platitudes. 

Valuable  suggestions  have  been  received  from  Dr.  H.  C.  Taylor 
and  from  Dr.  W.  H.  Price,  both  of  the  University  of  Wisconsin. 

In  conclusion,  I  wish  to  express  my  high  appreciation  of  the 
work  of  my  friends  and  colleagues  in  the  revision  of  this  book. 

RICHARD  T.  ELY. 
MADISON,  WISCONSIN, 
July,  1908. 


CONTENTS 

BOOK  I.  — INTRODUCTION 

PACK 

PREFACE         v 

CHAPTER  I.  —  THE  NATURE  AND  SCOPE  OF  ECONOMICS 

Diversity  of  economic  study,  3 ;  Definition  of  economics,  4 ;  A 
social  science,  5  ;  Studies  man  in  process  of  development,  6 ;  Econo- 
mic laws,  7  ;  Principal  divisions  of  economics,  15. 

CHAPTER  II.  —  THE  CHARACTERISTICS  OF  THE  PRESENT  ECONOMIC 
SYSTEM 

Human  and  physical  conditions  of  economic  activity,  16  ;  Private 
enterprise  and  state  activity,  1 6 ;  Division  of  labor  and  exchange, 
18;  Mutual  dependence,  19;  Economic  classes,  19  ;  Private  prop- 
erty, 20;  Inheritance,  21;  Contract,  21  ;  Vested  interests,  22; 
Freedom,  23 ;  Competition  and  markets,  24 ;  Cooperation,  26 ; 
Monopoly,  26 ;  Custom,  27  ;  Authority  and  benevolence,  27. 

CHAPTER  III.  —  THE  EVOLUTION  OF  ECONOMIC  SOCIETY 

Basis  of  the  economic  stages,  29  ;  Direct  appropriation,  30 ; 
Primitive  man,  31;  Pastoral  stage,  32;  Agricultural  stage,  33; 
Manorial  economy  in  England,  34 ;  Handicraft  stage,  35  ;  Gilds, 
35  ;  Domestic  system,  36  ;  Agricultural  changes,  37  ;  The  mercan- 
tile system,  37  ;  Patents  of  monopoly,  38 ;  Industrial  stage,  39 ; 
Other  classifications,  39. 

CHAPTER  IV. — THE  EVOLUTION  OF  ECONOMIC  SOCIETY  (Continued} 

England  in  1760,  43  ;  Revolt  against  restrictions,  43  ;  Mechani- 
cal inventions,  44  ;  Agricultural  changes,  46  ;  Effects  of  industrial 
revolution,  47  ;  The  factory  system,  47  ;  Expansion  of  markets  and 
industrial  specialization,  48  ;  Evils  of  the  transition,  48  ;  Competi- 
tion and  laissez-faire,  49  ;  Reaction  against  the  passive  policy,  50  ; 
Quality  of  goods,  50 ;  Protection  of  labor,  51  ;  Labor  organizations, 
53  ;  Extension  of  government  enterprise,  54.. 


Viii  CONTENTS 

CHAPTER  V. — THE  ECONOMIC  DEVELOPMENT  OF  THE  UNITED  STATES 

Economic  stages  in  American  industrial  history,  56 ;  Sectional- 
ism, 57 ;  Characteristics  of  the  American  people,  58 ;  Growth  of 
population,  59 ;  Changes  in  the  birth  rate,  60 ;  Slavery  and  the 
negro  problem,  6l  ;  Immigration,  62  ;  Natural  resources,  66. 

CHAPTER  VI. — THE  ECONOMIC  DEVELOPMENT  OF  THE  UNITED 
STATES  {Continued") 

Mercantilism  in  America,  70;  American  industries  in  1776,  72  ; 
The  Industrial  Revolution  in  America,  72 ;  The  development  of 
agriculture,  75  ;  Manufactures,  76  ;  Transportation,  80 ;  The  labor 
movement,  83 ;  State  regulation  of  industry,  86. 


BOOK  II.  — PRINCIPLES   AND   PROBLEMS 

PART   I.  — INTRODUCTION 
CHAPTER  VII.  —  ELEMENTARY  CONCEPTS 

Motives  in  economic  activity,  93 ;  Utility,  95 ;  Free  and  econo- 
mic goods,  95;  Effort,  96;  Waiting,  96;  Services,  96;  Personal 
qualities  as  goods,  97  ;  Wealth,  98  ;  Wealth  and  income,  98  ;  In- 
dividual and  society,  98  ;  Wealth  and  value,  99  ;  Capital  and  other 
forms  of  wealth,  100  ;  Capital  goods  and  capital  value,  loo  ;  Social 
and  individual  capital,  101  ;  National  wealth  and  national  divi- 
dend, 101. 

PART   II.  — CONSUMPTION 

CHAPTER  VIII.  —  CONSUMPTION 

Consumption  denned,  106 ;  Productive  and  final  consumption, 
106 ;  Human  wants,  107  ;  Law  of  diminishing  utility,  107  ;  Differ- 
ent uses  for  the  same  commodity,  108  ;  Marginal  utility,  108  ;  The 
economic  order  of  consumption,  1 10  ;  Future  wants,  1 1 1  ;  Alleged 
present  consumption  of  future  products,  H2;  Consumption  and 
saving,  113;  Luxury,  113;  Ideal  distribution  of  wealth,  114; 
Harmful  consumption,  116;  Statistics  of  consumption,  117. 

PART   III.  — PRODUCTION 

CHAPTER  IX.  —  PRODUCTION 

Production  defined,  121  ;  The  factors  of  production,  122  ;  Saving 
and  capital  formation,  123  ;  Production  and  sacrifice,  124;  Cost  of 
production  and  expense  of  production,  125  ;  Separation  in  owner- 
ship and  organization  of  factors,  126 ;  The  undertaker,  127  ;  Kinds 


CONTENTS 

of  division  of  labor,  127;  Advantages  of  division  of  labor,  128; 
Effect  upon  the  worker  and  the  product,  129;  Territorial  division 
of  labor,  131  ;  Productive  organization  of  the  American  people,  132. 

CHAPTER  X.  —  BUSINESS  ORGANIZATION 

Nature  of  business  units,  136;  The  corporation  charter,  141; 
Corporation  capital  and  securities,  143 ;  Overcapitalization,  144 ; 
Forms  of  capitalization,  146  ;  Corporation  management,  147  ;  Ad- 
vantages and  social  aspects  of  corporations,  148;  Trusts,  150; 
Publicity,  153;  Federal  control,  154. 


PART  IV.  — VALUE  AND  EXCHANGE 
CHAPTER  XI. — VALUE  AND  PRICE 

Meaning  and  significance  of  value,  156  ;  The  market,  158  ;  Con- 
ditions of  competitive  valuation,  159;  Supply  and  demand,  160; 
Nature  of  demand,  160;  Elasticity  of  demand,  163;  Consumer's 
surplus,  164;  Nature  of  supply,  165  ;  The  determination  of  price, 
167  ;  Producer's  surplus,  169. 

CHAPTER  XII.  —  VALUE  AND  PRICE  {Continued} 

Normal  value,  170;  Different  conditions  of  supply,  172;  Con- 
stant and  variable  expenses,  174;  Joint  expenses  of  production, 
177;  Surplus  of  bargaining,  177;  Non-reproducible  goods,  178; 
Monopoly  value,  1 79 ;  Retail  prices,  1 79 ;  Public  authority  and 
value,  179;  Imputed  value,  181  ;  Valuation  of  production  goods, 
182;  Other  theories  of  value,  183. 

CHAPTER  XIII.  —  MONOPOLY 

The  idea  of  monopoly,  187;  Partial  monopoly,  191  ;  Classifica- 
tion and  causes,  192  ;  Public  and  private,  193  ;  Social  and  natural, 
194  ;  Local,  national,  and  international,  196  ;  monopoly  price,  197  ; 
Law  of  monopoly  price,  201  ;  Class  price,  202 ;  Monopoly  price, 
high  price,  206 ;  Monopolies  and  distribution  of  wealth,  208 ; 
Public  policy  toward  monopolies,  209  ;  Relation  of  monopoly  to 
trusts,  211. 

CHAPTER  XIV.  —  MONEY 

Definitions,  214  ;  Metallic  money,  216  ;  Coinage,  217;  Seignior- 
age, 217;  The  standard  of  value,  221;  Limited  coinage,  224; 
Bimetallism,  225  ;  The  gold  standard,  234 ;  Government  paper 
money,  234 ;  Colonial  and  Revolutionary  bills  of  credit,  235  ;  The 
greenbacks,  236  ;  Hat  money,  241. 


CONTENTS 

CHAPTER  XV  —  CREDIT  AND  BANKING 

Credit  transactions,  243  ;  Personal  credit,  246  ;  Bank  credit,  247  ; 
Bank  notes,  250  ;  State  banks  of  issue,  250  ;  The  national  banking 
system,  251;  The  reserve  system,  252;  The  New  York  money 
market,  253  ;  Speculation  and  the  New  York  money  market,  255  ; 
The  independent  treasury  system,  257  ;  The  movement  of  money, 
258  ;  Elastic  currency,  260 ;  A  central  bank,  262 ;  State  and  pri- 
vate banks,  263. 

CHAPTER  XVI.  —  OTHER  PROBLEMS  IN  MONEY  AND  BANKING 
Crises,  267 ;    Effects  of  changes  in  the  value  of  money,  270 ; 

The  standard  of  deferred  payments,  271  ;     Index  numbers,  272; 

The  value  of  money,  275  ;  The  production  of  gold,  280. 

CHAPTER  XVII.  —  INTERNATIONAL  TRADE 

Nature  and  advantages  of  international  trade,  284  ;  Law  of  com- 
parative costs,  285  ;  Restrictions  on  international  trade,  286 ;  Bal- 
ance of  trade,  288 ;  Foreign  exchange,  292 ;  Regulation  of  gold 
supply,  296. 

CHAPTER  XVIII.  —  PROTECTION  AND  FREE  TRADE 
The  case  for  protection,  300 ;  Arguments  of  free-traders,  305  ; 
Conclusions,  311. 

PART  V.  — DISTRIBUTION 

CHAPTER  XIX.  —  DISTRIBUTION  AS  AN  ECONOMIC  PROBLEM 
Distribution  controlled  by  existing  institutions,  317;  The  dis- 
tributive process,  318;  Distribution  as  valuation,  319;  Law  of 
diminishing  productivity,  319-326 ;  Marginal  productivity,  326- 
331  ;  Marginal  productivity  and  valuation,  331  ;  Social  aspects  of 
diminishing  productivity,  332. 

CHAPTER  XX.  —  THE  PERSONAL  DISTRIBUTION  OF  WEALTH 
Wealth  and  income,  335  ;  Absolute  and  relative  well  being,  335  ; 
Concentration  of  wealth  and  large  scale  production,  335  ;  Methods 
of  measuring  concentration  of  wealth  and  income,  336  ;  Statistics 
of  distribution,  337  ;  Causes  of  poverty  and  riches,  341  ;  The  diffu- 
sion of  wealth,  343  ;  Modifying  wealth  acquisition,  345. 

CHAPTER  XXI.  —  THE  RENT  OF  LAND 

The  services  of  land,  349  ;  Rent  under  uniform  intensivity  of  cul- 
tivation, 351;  Rent  under  actual  conditions,  354;  The  different 
uses  of  land,  357  ;  The  capitalization  of  rent,  359  ;  Rent  and  social 
progress,  360  ;  The  unearned  increment,  363  ;  Urban  lands,  365. 


CONTENTS  xi 

CHAPTER  XXII. — THE  WAGES  OF  LABOR 

Wages  as  the  price  of  labor,  367  ;  Demand  for  labor,  368  ;  Labor 
saving  machinery,  369  ;  Supply  of  labor,  371  ;  Growth  of  popula- 
tion, 373  ;  Subsistence  theory  of  wages,  376  ;  The  standard  of  life 
and  wages,  377 ;  Supply  of  labor  in  different  occupations,  380 ; 
The  wage  contract,  381  ;  Wages  and  efficiency,  382. 

CHAPTER  XXIII.  —  LABOR  PROBLEMS 

Types  of  labor  organizations,  387  ;  Jurisdiction  disputes,  388 ; 
Economic  justification  of  labor  organizations,  389  ;  Labor  organiza- 
tions and  monopoly,  390  ;  Methods  and  policies  of  labor  organiza- 
tions, 391  ;  Educational  and  fraternal  activities,  394 ;  The  strike, 
395  ;  Employers'  associations,  400 ;  Agencies  of  industrial  peace, 
401  ;  Trade  arbitration,  403  ;  Voluntary  arbitration,  404  ;  Com- 
pulsory arbitration,  404  ;  Profit  sharing,  406 ;  Industrial  democracy, 
408 ;  Cooperation,  409. 

CHAPTER  XXIV.  —  INTEREST 

Definition,  416;  Inadequate  explanations,  417;  Why  interest 
can  be  paid,  418 ;  The  necessity  of  interest,  419 ;  The  investment 
and  replacement  of  capital,  420-428 ;  The  expense  and  value  of 
capital,  428 ;  Capital  and  land,  431  ;  Capital  and  consumption 
goods,  434  ;  The  rate  of  interest,  435  ;  Gross  and  net  interest,  437. 

CHAPTER  XXV.  —  PROFITS 

The  entrepreneur's  wage,  440;  Speculative  gains,  441  ;  Chance 
gains,  445  ;  Gains  of  bargaining,  446 ;  Non-competitive  profits, 
446  ;  The  social  dividend,  448. 


PART  VI.  — THE  RELATION  OF  THE  STATE  TO  INDUSTRY 

CHAPTER  XXVI. — NECESSITY  OF  STATE  ACTIVITY 

The  state  and  the  meaning  of  state  activity,  458  ;  State  and  gov- 
ernment, 459  ;  Purity  and  efficiency  of  the  state  in  relation  to  eco- 
nomic activity,  459 ;  general  statement  of  the  necessity  of  state 
activity,  460  ;  The  state  and  the  fundamental  institutions  of  society, 
460 ;  Property,  private  and  public,  461  ;  trade-marks,  copyrights, 
and  patents,  463  ;  Public  property,  465  ;  Inheritance  of  property, 
466  ;  Contract,  466  ;  Ethical  level  of  competition,  467  ;  The  con- 
sumer, 467  ;  Monopolies,  government  ownership,  etc.,  468  ;  The 
state  as  the  guardian  of  the  permanent  interests  of  society,  468. 


xii  CONTENTS 

CHAFFER  XXVII. — TRANSPORTATION 

Scope  and  significance,  471  ;  The  railway  system  of  the  United 
States,  472  ;  Railway  competition,  473  ;  Pooling  and  consolidation, 
475  ;  The  movement  of  rates,  475  ;  The  level  of  rates,  477  ;  Rela- 
tive rates,  478 ;  Distance,  480 ;  Government  ownership,  479 ; 
Regulation  of  railways,  481  ;  The  Interstate  Commerce  Commis- 
sion, 483. 

CHAPTER  XXVIII.  —  INSURANCE 

Nature  of  insurance,  485  ;  Law  of  probabilities,  486  ;  Origin  and 
development,  486 ;  Forms  of  insurance  organization,  489 ;  Life 
tables,  490;  The  reserve,  491  ;  The  surplus,  491  ;  Endowments, 
492  ;  Industrial  insurance,  493  ;  State  insurance,  493  ;  State  regu- 
lation, 494. 

CHAPTER  XXIX.  —  ECONOMIC  ACTIVITIES  OF  MUNICIPALITIES 

Importance  of  municipal  activity,  496 ;  Character  of  municipal 
activities,  498 ;  Protection  through  competition,  501  ;  Methods  of 
public  regulation,  503 ;  Municipal  management,  507 ;  Municipal 
home  rule,  512. 

CHAPTER  XXX.  —  SOCIALISM 

Socialism  defined,  515;  Distributive  justice,  515;  Varieties  of 
socialism,  516  ;  Communism,  519  ;  Socialism  an  extension  of  exist- 
ing institutions,  519;  The  strength  of  socialism,  520;  The  weak- 
ness of  socialism,  521  ;  Social  reform,  523  ;  The  socialist  movement, 
524 ;  Anarchism,  525. 

CHAPTER  XXXI.  —  AGRICULTURAL  PROBLEMS 

Size  of  farms,  528 ;  Ownership  and  tenancy,  533';  Farm  labor, 
536 ;  Farm  indebtedness  and  agricultural  credit,  538 ;  Tenancy  vs. 
encumbered  ownership,  540 ;  Marketing  of  farm  products,  543 ; 
Speculation,  546 ;  Education  and  organization,  548. 


BOOK   III.— PUBLIC   FINANCE 

CHAPTER  XXXII.  —  PUBLIC  EXPENDITURES 
Nature  and  significance  of  public  finance,  555 ;  Expenditures  of 
public  and  private  economics  contrasted,  558;  The  proper  propor- 
tion between  the  total  income  of  society  and  public  expenditures, 
560;  Economy  vs.  parsimony,  564;  Historical  development,  566; 
Development  of  public  expenditures  with  respect  to  regularity  and 
irregularity,  570;  Terms  used  in  public  expenditures,  572;  Classi- 
fication of  public  expenditures,  573. 


CONTENTS  xiii 

CHAFFER  XXXIII.  —  PUBLIC  REVENUES  FROM  LOANS  AND 
GOVERNMENT  OWNERSHIP 

Classification,  580  ;  Temporary  revenues  and  public  debts,  582  ; 
Public  domains,  586;  Land  policy  of  the  United  States,  587;  Forest 
lands,  589;  Mineral  lands,  591;  Success  of  our  land  policy,  593; 
Land  nationalization  and  municipalization,  public  industries,  595; 
Public  industries,  597. 

CHAPTER  XXXIV.  —  PUBLIC  REVENUES:  DERIVATIVE  REVENUES, 
FEES,  SPECIAL  ASSESSMENTS,  AND  TAXES 

Definitions,  605;  Fees,  606;  Special  assessments,  608;  Taxes, 
610;  Justice  in  taxation,  612;  Progressive  taxation,  616;  The 
shifting  of  taxes,  619. 

CHAPTER  XXXV.  —  PUBLIC  REVENUES:  FEDERAL,  STATE,  AND 
LOCAL  TAXES 

Direct  and  indirect  taxes,  625;  Customs  duties,  627;  Internal 
revenue  duties,  631 ;  Taxes  on  transactions,  633;  Inheritance  taxes, 
637;  General  property  tax,  640;  Corporation  taxes,  645;  Business 
and  license  taxes,  648;  Poll  taxes,  649;  Federal  control  of  taxa- 
tion of  interstate  commerce,  650;  Separation  of  sources  of  state  and 
local  revenues,  651. 

BOOK   IV.  — HISTORY  OF   ECONOMIC 
THOUGHT 

CHAPTER  XXXVI.  —  HISTORY  OF  ECONOMIC  THOUGHT 

The  development  of  economic  thought,  657  ;  Economic  ideas  in 
the  ancient  world,  658  ;  The  Middle  Ages,  661  ;  Modern  times, 
662  ;  Adam  Smith,  664  ;  The  classical  school,  665  ;  Socialism, 
668  ;  The  sociologists,  669  ;  The  historical  school,  669  ;  The  eco- 
nomic optimists,  670 ;  Early  American  economists,  672 ;  The 
Austrian  school,  673  ;  Present  condition  of  economic  thought,  674. 

APPENDIX  A :    Statistics  of  Public  Expenditure 677 

APPENDIX  B :    Subjects  for  Essays  and  Courses  of  Reading     .        .        .     685 
INDEX 697 


BOOK   I 
INTRODUCTION 


OUTLINES    OF   ECONOMICS 

CHAPTER  I 
THE  NATURE  AND   SCOPE   OF   ECONOMICS 

THE  most  striking  characteristics  of  the  great  field  of  knowledge 
the  Outlines  of  which  we  attempt  to  sketch  in  the  present  volume 
are  its  rich  diversity  and  spacious  amplitude.  Starting  from  psychol- 
ogy in  its  analysis  of  the  human  needs  which  explain  or  condition 
wealth,  it  traverses  the  entire  field  of  social  activities  and  institu- 
tions arising  from  man's  efforts  to  supply  his  material  needs.  It 
touches  on  one  side  the  physical  sciences  —  from  which  it  borrows 
some  of  its  most  fundamental  principles;  occupies  joint  terri- 
tory at  places  with  politics,  ethics,  and  law,  although  their 
respective  jurisdictions  are  in  the  main  distinct;  and  forms  at 
once  the  most  fertile  and  most  thoroughly  developed  province  of 
the  broad  science  of  human  society.  Within  its  borders,  if  we 
may  continue  to  compare  the  scientific  possibilities  of  economics 
with  the  natural  resources  of  an  opulent  territory,  opportunity  is 
offered  for  the  exercise  of  every  mental  aptitude  and  every  scientific 
method.  The  historian's  gift  is  needed  to  unravel  the  past  and 
trace  the  development  of  the  industrial  institutions  whose  present- 
day  problems,  in  turn,  offer  indefinite  scope  for  the  studies  of  the 
more  practical  student  with  a  taste  for  administration  or  business 
management.  For  the  legal  mind  there  are  the  subtle  problems 
of  property,  inheritance,  labor  legislation,  and  corporation  control; 
for  the  mathematically  inclined,  insurance  and  modern  statistics; 
for  students  with  practical  political  interests,  the  tariff,  currency 
reform,  and  a  score  of  important  problems  in  which  economics 
and  politics  are  inextricably  interwoven;  for  the  philanthropic, 
unemployment,  accident  insurance,  and  a  number  of  social  prob- 

3 


4  OUTLINES   OF   ECONOMICS 

lems  growing  out  of  the  maladjustments  of  modern  industry. 
Animating  the  entire  subject,  blended  of  course  with  the  love  of 
truth  for  truth's  sake  common  to  all  sciences,  is  the  persistent 
hope  that  by  systematic  study  we  may  eventually  abolish  the  ma- 
terial poverty  which  deadens  and  dwarfs  the  lives  of  millions  of 
our  fellows.  Economics  is  a  science,  but  something  more  than  a 
science;  a  science  shot  through  with  the  infinite  variety  of  human 
life,  calling  not  only  for  systematic,  ordered  thinking,  but  for 
human  sympathy,  imagination,  and  in  an  unusual  degree  for  the 
saving  grace  of  common  sense. 

To  define  such  a  subject  adequately  in  a  few  sentences  is  mani- 
festly impossible.  It  is  frequently  said  that  economics  treats  of 
man's  efforts  to  earn  a  living,  and  this  definition  is  not  inaccurate 
if  by  "man"  we  understand  "mankind,"  and  if  we  fully  appre- 
ciate that  the  individual's  efforts  to  turn  an  honest  penny's  profit 
receive  but  little  attention  in  comparison  with  the  community's 
efforts  to  feed,  clothe,  and  shelter  itself.  Satisfaction  of  social 
need,  and  not  individual  profit,  is  the  objective  point  of  the  science. 
So,  similarly,  economics  has  been  characterized  as  the  philosophy 
of  human  industry;  and  this  description  is  illuminating  provided 
we  interpret  "industry"  broadly  enough.  Even  the  old  tradi- 
tional definition,  that  economics  is  the  science  of  wealth,  is  true 
enough  if  we  clearly  understand  that  there  can  be  no  wealth  with- 
out man,  and  that  the  science  which  deals  with  wealth,  so  far 
from  being  a  "gospel  of  mammon,"  necessarily  begins  and  ends 
in  the  study  of  man.  As  we  prefer  to  define  it,  however,  econo- 
mics is  the  science  which  treats  of  those  social  phenomena  that  are 
due  to  the  wealth-getting  and  wealth-using  activities  of  man. 

Economics  treats  of  Man.  —  The  supreme  importance  of  man 
in  the  study  of  wealth  has  not  always  been  appreciated  by  those 
who  have  expounded  the  science.  Too  often  they  have  considered 
man  simply  as  a  producer  of  wealth,  the  one  "by  whom"  the 
necessaries,  conveniences,  and  luxuries  of  life  are  created,  whereas 
the  infinitely  greater  truth  is  that  man  is  the  one  "for  whom" 
they  are  all  produced.  Of  course  no  one  denies  this  truth,  but 
one  might  almost  as  well  deny  it  as  to  leave  it  out  of  account. 
The  result  of  such  neglect  is  that  men  devise  with  great  skill 


THE   NATURE   AND    SCOPE   OF   ECONOMICS  5 

rules  by  which  man  may  be  made  the  best  possible  manufactur- 
ing machine.  It  sometimes  quite  escapes  the  notice  of  these 
persons  that  in  making  man  the  best  possible  manufacturing 
machine  they  may  make  him  a  very  poor  sort  of  a  man;  that  in 
teaching  him  to  supply  his  wants  very  bountifully  they  may  pre- 
vent his  developing  and  correcting  those  same  wants.  They  for- 
get that  there  are  two  kinds  of  poverty  —  one  a  lack  of  goods  for 
the  higher  wants,  the  other  a  lack  of  wants  for  the  higher  goods. 
To  become  rich  in  goods  while  losing  at  the  same  time  the  power 
to  profit  by  them  is  unfortunately  one  of  the  commonest  retro- 
gressions in  human  experience.  We  do  not  mean  that  the  whole 
problem  of  human  development  is  the  subject  of  economics,  but 
simply  that  manhood,  rounded  human  development,  is  the  goal 
of  all  social  sciences,  and  none  must  consider  their  subject  so 
narrowly  as  to  exclude  that  object. 

Another  common  mistake  has  been  to  regard  as  of  chief  im- 
portance the  economic  activities  of  one  particular  class,  especially 
the  employer.  Other  men  were  treated  simply  as  "a  factor  in 
production."  An  English  writer  speaks  of  dear  labor  as  one  of 
the  chief  obstacles  to  England's  economic  prosperity.  Could 
anything  be  more  utterly  an  oversight  of  general  human  well- 
being?  Dear  labor  should  be  the  very  goal  of  England's  eco- 
nomic effort,  for  that  means  abundant  supply  of  the  wants  of  the 
great  mass  of  her  people ;  and  the  fact  that  labor  is  dear,  so  far 
from  being  an  obstacle  to  prosperity,  is  the  very  proof  and  sub- 
stance of  that  prosperity.  A  glance  at  history  indicates  that  men 
have  made  these  mistakes  not  only  in  theory  but  in  practice. 
Industries  have  been  developed  to  majestic  proportions  while 
man  was  sinking  into  deeper  degradation ;  wealth  has  grown 
at  the  expense  of  that  human  weal  in  whose  service  it  won  its 
name. 

Economics  treats  of  Man  in  Society.  —  This  is  one  of  those 
truisms  which  only  history  can  make  real  to  us.  As  we  pass  from 
the  savage  and  cannibal,  up  through  all  the  stages  of  development, 
we  find  an  ever-increasing  interdependence  among  men.  Man  is 
least  dependent  when  he  wants  least,  cares  least,  has  least,  knows 
least,  and  is  least.  With  every  betterment  of  condition  and  char- 


6  OUTLINES   OF  ECONOMICS 

acter  he/ is  more  dependent  than  before,  more  dependent  and  yet 
more  free.  The  beginnings  of  barter  are  a  confession  of  mutual 
need;  the  coining  of  money  is  a  declaration  of  dependence  to  all 
men.  We  look  with  pride  upon  a  century  of  progress,  but  that 
progress  has  consisted  in  little  else  than  a  growth  of  dependence, 
an  ever-increasing  departure  from  that  rude  kind  of  literal  self- 
help  in  which  each  one  does  everything  for  himself.  Our  fathers 
drew  water,  each  for  himself,  in  "the  moss-covered  bucket,"  while 
our  mothers  dipped  candles  for  the  evening's  light.  If  one  was 
negligent,  the  rest  did  not  suffer.  To-day  a  network  of  pipes  radi- 
ate from  a  common  center  to  enter  a  thousand  households.  An 
engineer  makes  a  blunder  at  the  station,  and  thousands  are  in 
darkness  or  drought.  Progress  is  a  passage  from  independence 
to  dependence,  from  distrust  to  confidence,  from  hostility  to  amity, 
from  helplessness  to  helpfulness,  while  the  great  law  of  social 
solidarity  gains  ever-increasing  importance.  Our  science,  then, 
is  interested  primarily  in  man  in  his  relations  to  others,  and  not 
in  man  by  himself.  Moreover,  as  a  science  which  studies  the  pres- 
ent in  order  that  it  may  predict  and  prepare  for  the  future,  and 
discovering  that  interdependence  is  the  law  of  progress,  it  must 
not  hesitate  to  shape  its  principles  with  reference  to  a  solidarity 
which  shall  grow  more  rather  than  less,  stronger  rather  than 
weaker. 

Economics  treats  of  Man  as  in  Process  of  Development.  —  Few 
truths  are  more  easily  admitted  or  more  persistently  ignored  than 
that  of  change  in  human  life  and  condition.  History  makes  it 
real.  Man  now  wanders  about  by  force  of  necessity  and  age-long 
habit,  now  starves  rather  than  be  moved  from  his  home.  Land 
is  now  free  to  all,  now  parceled  out  with  well-nigh  absolute  right 
of  individual  possession.  The  seemingly  eternal  features  of  the 
social  structure  are  gone  in  a  few  generations.  Nothing  so  invali- 
dates theories,  laws,  general  principles,  institutions,  and  enter- 
prises as  this  great  law  of  change  of  which  we  seldom  take  full 
account.  Take,  for  instance,  bequests.  Nothing  is  commoner 
than  for  a  man  to  leave  a  legacy  under  specified  and  detailed 
regulations,  binding  for  all  time.  One  leaves  money  to  endow  a 
religious  service  in  a  language  which  in  a  few  generations  no  one 


THE   NATURE   AND   SCOPE   OF  ECONOMICS  7 

understands;  another  founds  a  college  to  teach  certain  doctrines 
which  in  a  century  no  one  believes;  and  so  on  indefinitely.  These 
and  a  thousand  other  laborious  efforts  of  statesman,  warrior,  or 
philosopher  quite  lose  their  worth  for  the  future  because  their 
authors  assumed  that  the  future  would  be  like  their  present.  Even 
the  wages  system  and  the  division  between  capital  and  labor  which 
seem  rooted  in  the  constitution  of  society  are  scarcely  two  centu- 
ries old  as  a  general  system.  One  must  never  forget  in  the  study 
of  economics  that  the  phenomena  with  which  it  deals  are  per- 
vaded by  the  spirit  of  life,  moving  forward  or  backward,  pro- 
gressing or  decaying,  under  those  influences  which  control  the  rise 
and  fall  of  social  institutions.  The  science  is  biological  rather 
than  mechanical. 

The  Laws  with  which  Economics  Deals.  —  The  evolutionary 
character  and  complexity  of  economic  phenomena,  which  account 
for  much  of  the  charm  of  the  subject,  endow  it  also  with  unusual 
difficulties.  Conclusions  true  for  one  generation  are  invalid  in 
the  next.  Terms  and  definitions  appropriate  to  one  stage  of  in- 
dustry are  misleading  in  a  succeeding  stage.  Generalizations  valid 
for  one  nation  and  government  are  inapplicable  to  another.  Even 
those  laws  or  uniformities  which  the  science  prizes  as  the  finest 
product  of  its  research  are  but  statements  of  probabilities  —  dec- 
larations of  what  is  most  likely  to  occur  for  the  mass  of  men  in 
the  long  run  under  certain  specified  circumstances. 

In  no  department  of  knowledge,  consequently,  is  there  greater  need  of 
temperate  statement  and  of  that  humility  of  mind  which  is  the  surest  safe- 
guard against  bigotry  and  dogmatism.  No  system  of  economics  is  appli- 
cable unchanged  to  all  times  and  all  places :  the  premises  of  the  arguments 
change ;  the  ingredients  of  nearly  every  problem  present  themselves  in  differ- 
ent proportions;  and  the  conditions  of  almost  every  question  vary  from 
country  to  country  and  from  generation  to  generation.  The  student  must  not 
expect  rules  of  thumb  by  which  he  can  decide  offhand  the  economic  problems 
of  the  particular  city  or  country  district  in  which  he  is  for  the  moment  inter- 
ested. No  general  treatise  on  economics  can  authoritatively  decide  the 
practical  problems  of  particular  times  and  places;  although  the  economist, 
before  all  other  students,  is  forced  to  deal  with  practical  problems.  What 
such  a  treatise  can  do  is  to  point  out  mistakes  of  logic  common  in  the  current 
discussions  of  economic  questions,  call  attention  to  obscure  factors  —  some- 
times of  great  importance  —  which  the  practical  man  is  likely  to  overlook, 


8  OUTLINES   OF  ECONOMICS 

give  solutions  of  typical  problems  which  are  likely  to  arise,  and  thus  afford  a 
training  which  will  assist  the  student  in  solving  practical  problems  for  himself. 
The  peculiar  and  distinctive  office  of  the  economic  scientist,  however,  is 
to  emphasize  the  less  tangible  truths,  the  remoter  consequences,  the  deeper 
and  consequently  less  obvious  forces  of  economic  society.  The  impulses 
of  the  moment,  the  immediate  demands  of  the  hour,  the  present  "fact"  that 
stares  us  in  the  face  (and  sometimes  blinds  us),  are  not  likely  to  lack  vigorous 
champions ;  and  to  preserve  the  balance  there  is  need  of  a  craft  of  thinkers 
far  enough  removed  from  the  battle  to  preserve  the  wider  outlook,  mindful 
of  the  lessons  of  the  past,  jealous  for  the  rights  of  the  future,  insistent  upon 
the  less  obvious  truths.  This  is  why  economics  so  frequently  appears  to 
the  practical  man  strained  and  academic.  This  impression  arises  from  a 
difference  of  emphasis  which  in  the  main  is  as  salutary  as  it  is  inevitable. 
The  academic  quality  of  the  economist's  work  arises  sometimes  from  igno- 
rance, sometimes  from  pedantry,  but  more  frequently  from  his  courageous 
insistence  upon  the  importance  of  the  less  tangible  truths  and  the  distant 
consequences  of  present  action. 

Is  not  economics,  then,  a  science  based  upon  natural  law  ?  The 
question  is  largely  a  verbal  one.  What  do  we  mean  by  natural 
law?  In  the  narrowest  sense  natural  laws  are  the  habits  of  na- 
ture which  know  absolutely  no  variation.  Such  are  gravitation 
and  chemical  affinity;  and  the  sciences  based  upon  such  laws  — 
astronomy,  physics,  and  chemistry  —  were  the  first  to  develop, 
and  have  attained  a  maximum  degree  of  exactitude.  The  term 
"  science  "  is  sometimes  used  in  a  way  to  imply  only  sciences  of 
this  character.  These  sciences  are  more  properly  known  as 
exact  sciences,  and  they  are  characterized  by  the  fact  that  the 
relations  with  which  they  deal  can  usually  be  expressed  quanti- 
tatively. 

When  we  come  in  contact  with  life,  however,  and  especially 
with  its  higher  forms,  the  exactness  with  which  an  astronomer 
predicts  an  eclipse  or  a  chemist  anticipates  a  reaction  becomes 
impossible.  Not  that  life  is  without  laws;  very  far  from  it.  There 
is,  in  the  first  place,  the  basis  of  physical  nature,  with  its  perfect 
regularity,  upon  which  all  life  rests  and  to  which  it  must  conform. 
Then,  too,  there  are  laws  governing  life  directly  and  pertaining  to 
it.  These  form  the  subject  of  the  group  of  sciences  known  as 
biology.  We  must  remember,  however,  that  all  we  can  say  of 
natural  laws  is  that  they  are  habits,  not  compulsory  necessities  of 


THE   NATURE   AND   SCOPE   OF   ECONOMICS  9 

nature,  and  the  laws  of  life  seem  to  differ  from  those  of  inanimate 
nature  in  that  they  are  not  quite  invariable  habits.  Variability 
seems  to  be  inherent  in  life,  increasing  as  life  rises  in  the  scale  of 
development.  It  is  often  assumed,  to  be  sure,  that  these  laws  are 
as  invariable  as  any  other,  and  that  this  seeming  variability  is 
only  a  greater  complexity  which  we  do  not  yet  understand.  How- 
ever that  may  be,  the  result  is  the  same  for  the  present.  The  sci- 
ences of  life  are  not  exact  in  the  sense  we  have  defined.  We  must 
further  note  that  in  so  far  as  a  science  deals  with  facts  which  seem 
to  be  governed  by  no  invariable  law,  or  whose  law  has  not  been 
discovered,  it  must  content  itself  with  a  description  of  this  part 
of  its  subject.  Thus  we  have  the  term  "  descriptive  science."  We 
might  better  speak  of  the  descriptive  part  of  a  science,  for  all 
sciences  are  able  in  part  to  reduce  their  facts  to  law. 

What  has  been  said  of  the  sciences  dealing  with  life  applies  to 
an  even  greater  extent  to  those  sciences  which  deal  with  man.  It 
is  perfectly  true,  of  course,  that  within  certain  limits  man  is  gov- 
erned by  absolutely  invariable  laws.  He  is  as  much  bound  by 
gravitation  as  anything  else,  and  if  he  falls  over  a  precipice,  we 
can  predict  the  results  as  certainly  as  though  a  stone  fell  over. 
But,  without  entering  the  bog  of  discussion  as  to  the  nature  of 
human  freedom,  we  may  safely  assume,  for  practical  purposes, 
that  man  is  also,  within  certain  limits,  a  law  unto  himself.  No- 
where do  we  find  an  element  of  variability  so  great  and  so  seem- 
ingly ultimate  as  here.  We  must  remember,  therefore,  that  the 
sciences  which  deal  with  man  deal  with  a  being  who  is  modified 
by  his  environment,  but  who  has  the  power  of  modifying  that  envi- 
ronment by  his  own  conscious  effort. 

Let  us  consider  very  carefully  what  this  means.  It  does  not 
mean  simply  that  man  modifies  his  environment  because  he  has 
been  modified  by  it  and  so  reacts  upon  it,  just  as  things  do  when 
they  come  in  contact.  If  we  accept  this  view,  we  shall  come  to 
Herbert  Spencer's  theory  of  natural  selection.  The  forces  at  work 
accomplish  their  own  results,  according  to  this  theory,  whether 
man  will  or  will  not,  simply  by  natural  action  and  reaction.  This 
implies  that  man  is  modified  by  his  environment,  and  that  he  in 
turn  modifies  that  environment  without  conscious  effort.  This 


10  OUTLINES   OF   ECONOMICS 

theory  is  based  on  an  assumption  that  man  has  no  power  of  initi- 
ating an  influence,  and  consistently  concludes  that  social  develop- 
ment, like  geological  development,  must  be  left  to  work  itself  out. 
Mr.  Spencer,  however,  goes  farther,  and  stoutly  maintains  that 
man,  by  conscious  effort,  especially  by  collective  or  state  effort, 
not  only  does  not  help  this  development,  but  actually  hinders  it. 
In  this  the  whole  theory  is  abandoned,  for  it  is  plain  that  if  man 
by  conscious  effort  can  hinder  a  process,  he  can  help  that  process 
in  the  same  way,  if  he  only  has  enough  wisdom  and  sense.  These 
it  is  the  purpose  of  science  to  give  him. 

In  opposition  to  the  theory  of  natural  selection,  or  unconscious 
development,  has  been  urged  the  theory  of  artificial  selection,  or 
conscious  development.  Ages  of  natural  selection  made  of  the 
potato  a  lean,  watery,  unpalatable  tuber;  a  few  years  of  artificial 
selection  made  it  a  valuable  food  product  and  a  table  delicacy. 
Compare  the  development  of  domestic  animals  in  the  last  few 
years,  under  man's  conscious  guidance,  with  then-  slow  and  meager 
development  in  a  state  of  nature.  Man  has  precisely  this  power 
of  consciously  modifying  the  natural  and  artificial  elements  of  his 
environment,  and  this  power  continually  enlarges. 

So,  when  we  ask  if  economics  deals  with  natural  laws,  we  really 
ask  whether  this  being,  whose  activity  in  a  certain  line  we  are 
studying,  is  governed  by  such  laws.  It  we  mean  by  this  to  ask 
whether  his  action  is  characterized  by  absolutely  invariable  hab- 
its, like  the  forces  of  physics,  we  must  plainly  answer,  no.  If 
man  had  no  power  of  initiative,  or,  on  the  other  hand,  were  so 
perfectly  rational  as  to  always  do  the  wisest  thing,  there  would  be 
a  regularity  in  his  action  which  might  perhaps  form  the  basis  of 
a  complicated,  but  exact,  science.  As  it  is,  all  social  sciences  are 
approximate  and  partly  descriptive.  There  is  much  in  man's  ac- 
tion which  is  exceedingly  (though  not  perfectly)  regular,  and  hence 
we  have  general,  though  apparently  not  invariable,  laws.  There 
is  a  part  of  his  action,  however,  that  seems  as  yet  to  be  capricious, 
and  we  can  only  make  note  of  it  till  we  have  more  knowledge. 

The  laws  of  economics  are  not  comparable  to  the  laws  of  inani- 
mate nature  in  invariability,  but  they  are  of  very  general  applica- 
bility, and  are  wholly  in  line  with  the  action  and  intent  of  nature, 


THE  NATURE  AND   SCOPE   OF  ECONOMICS  II 

and  are,  in  this  sense,  "natural."  But  the  laws  of  economics  are 
not  natural  laws  in  the  sense  in  which  the  word  is  often  used; 
namely,  laws  external  to  man  and  not  at  all  the  product  of  man. 
The  laws  of  economics  have  been  designated  as  social  laws  to 
distinguish  them  from  those  of  physical  science.  Social  laws  de- 
scribe tendencies,  or  regularities,  which  appear  especially  in  the 
consideration  of  large  masses  of  facts.  Human  mortality  serves 
as  an  illustration.  When  and  how  a  certain  man,  as  A,  will  die, 
is  proverbially  uncertain;  but  when  we  speak  of  hundreds  of  thou- 
sands of  lives,  we  can  predict  with  such  an  approximation  of  accu- 
racy that  a  vast  business-like  life  insurance  can  be  built  upon 
the  regularity  of  the  action  of  death. 

The  foregoing  discussion  enables  us  to  answer  in  a  word  the 
much-mooted  question,  "Is  economics  a  science?"  It  is  not  an 
exact  or  mathematical  science,  though  certain  portions  of  the  sub- 
ject may  possibly  become  so.  It  is  an  approximate  and  partially 
descriptive  science,  like  all  sciences  dealing  with  man,  or  even 
with  life.  The  inexactness  of  the  social  sciences  is  due  to  the  very 
thing  which  gives  them  their  supreme  value,  the  nature  of  man 
and  the  greatness  of  their  subject. 

The  Relation  of  Economics  to  other  Sciences.  —  We  have  al- 
ready referred  briefly  to  the  relations  between  economics  and  some 
of  the  other  sciences,  but  the  topic  is  one  which  requires  fuller 
treatment.  In  one  sense,  economics  may  be  said  to  be  dependent 
upon  practically  every  other  science,  since  the  discoveries  in  every 
field  of  knowledge  almost  inevitably  react  upon  the  industrial  life 
of  man.  Modern  chemistry,  to  take  a  single  example,  has  revo- 
lutionized some  industries,  wholly  created  others,  and,  through 
the  agency  of  the  pure  food  laws,  may  claim  most  of  the  credit 
for  entirely  suppressing  others.  From  psychology  economics  takes 
the  axiomatic  principles  upon  which  the  laws  of  value  rest;  from 
physical  science  the  law  of  diminishing  returns  which  plays  such 
an  important  part  in  the  theory  of  distribution;  and  from  mathe- 
matics the  methods  by  which  to  ascertain  how  insurance  may  be 
safely  supplied  against  accidents,  death,  and  loss  by  fire.  But 
it  is  to  the  sister  sciences  dealing  primarily  with  man  that  eco- 
nomics is  most  vitallv  related. 


12  OUTLINES  OF  ECONOMICS 

Man  has  been  busy  from  the  first  in  several  lines  of  effort.  He 
has  talked,  worshiped,  fought,  studied,  and  each  of  these  lines 
of  effort  has  developed  its  own  faculties  and  institutions.  For 
convenience  we  may  arrange  these  in  eight  groups,  as  follows: 
language,  art,  education,  religion,  family  life,  society  life,  politi- 
cal life,  economic  life.  Each  of  these  is  the  subject  of  a  science 
more  or  less  developed.  The  group  of  society  life  —  that  is,  the 
life  of  polite  society,  calls,  parties,  balls,  and  the  like  —  has  been 
studied  but  little,  and  we  know  few  of  its  governing  principles.1 
Language,  on  the  other  hand,  is  a  science  which  has  attained  to 
very  complete  development.  The  rest  lie  scattered  between  these 
extremes. 

A  peculiar  feature  of  these  activities  is  that  they  are  all  of  them 
collective  activities,  activities  which  one  man  cannot  well  carry  on 
alone.  This  is  obviously  true  of  family  and  political  life,  language, 
and  others,  and  on  careful  examination  it  proves  to  be  true  of 
the  rest.  It  is  now  admitted,  after  many  experiments,  that  art 
and  even  religion  do  not  thrive  in  solitude.  It  would  seem  that 
if  a  man  could  do  anything  by  himself,  it  would  be  to  get  a  living; 
but  our  brief  study  of  history  impresses  us  with  the  insignificance 
of  all  such  effort  and  the  inevitable  tendency  of  men  to  drift  to- 
gether in  their  economic  activity.  If  it  were  possible  for  men  to 
live  in  isolation,  every  one  of  the  eight  lines  of  effort  we  have  men- 
tioned would  soon  dwindle  into  insignificance  or  altogether  cease. 
So  these  sciences  are  all  of  them  social  sciences;  and  as  the  sci- 
ences that  deal  with  life  are  now  grouped  together  under  the  name 
biology  (science  of  life),  so  the  social  sciences  are  grouped  under 
the  title  of  sociology,  or  the  science  of  society,  although  some 
sociologists  do  not  define  the  word  "sociology"  in  this  broad  sense 
of  an  all-embracing  science  of  human  association. 

Economics,  then,  is  a  branch  of  sociology.  We  have  already 
defined  it  as  the  science  which  treats  of  those  social  phenomena 
that  are  due  to  the  wealth-getting  and  wealth-using  activities  of 
man.  We  may  speak  of  the  wealth-getting  and  wealth-using 

1  An  attempt  to  examine  scientifically  some,  at  least,  of  the  phenomena  of 
polite  society  has  been  made  by  a  learned  jurist,  the  late  Professor  Rudolph  von 
Ihcring,  in  his  Zweck  im  Rtcht.  Cf.  also  Veblen,  The  Theory  of  the  Leisure  Class. 


THE  NATURE   AND    SCOPE   OF   ECONOMICS  13 

activities  in  all  their  relations  as  economic  life  or  economy.  Ac- 
cordingly, economics  is  the  science  which  deals  with  the  economy 
of  man.  A  useful  distinction  in  language  is  thus  made  between 
economy,  the  life  itself,  and  economics,  the  science  dealing  with 
that  life.  If  this  distinction  could  always  be  observed,  much  con- 
fusion would  be  avoided. 

We  have  economies  of  various  sorts:  the  economy  of  an  indi- 
vidual, of  a  family,  a  tribe,  a  city,  a  state,  or  a  nation,  and  we 
have,  correspondingly,  many  economic  units.  The  dominant  unit 
in  ancient  Greece,  for  example,  was  the  household,  which  included 
the  family  and  all  the  slaves  and  other  dependents.  These  lived 
together  and  formed  a  little  group  by  themselves.  The  economic 
life  of  Greece  meant,  largely,  a  sum  of  the  economic  activities  of 
these  households,  each  of  which  strove  to  be  sufficient  unto  itself. 
It  is  interesting  to  know  that  many  a  well-managed  Southern 
plantation  before  the  late  Civil  War  endeavored  to  produce  all  the 
means  of  life  on  the  plantation,  and  in  this  respect,  as  in  others, 
resembled  a  Greek  household.  But  as  time  has  progressed,  these 
old  groups  have  been  partially  dissolved,  and  in  many  instances 
in  modern  times  the  individual,  in  his  economic  activity,  consti- 
tutes a  unit,  although  the  family  is  still  the  prevalent  economic 
unit.  It  is  a  natural  outcome  of  industrial  progress,  as  already 
explained,  that  the  relations  between  these  units  have  multiplied 
indefinitely  in  number  and  in  importance.  This  is  simply  another 
way  of  describing  the  growing  interdependence  of  men.  Eco- 
nomics deals  especially  with  the  mutual  relations  of  economies  of 
all  kinds,  private  and  public.  It  is  chiefly,  if  not  exclusively,  a 
science  of  human  relations,  and  without  these  relations  could  not 
exist. 

Because  of  the  organic  connection  of  these  relations  in  their 
common  origin,  man,  and  because  economics  deals  with  the  indi- 
vidual as  he  is,  and  not  with  an  artificially  simplified  "economic 
man,"  it  is  impossible  wholly  to  dissociate  the  social  sciences, 
and  particularly  impossible  to  divorce  economics  completely  from 
ethics  and  politics.  This  does  not  mean  that  these  sciences  are 
all  one  and  cannot  be  profitably  subdivided.  On  the  contrary, 
because  of  the  limitations  of  the  human  mind,  they  must  be 


14  OUTLINES   OF  ECONOMICS 

studied  separately  so  far  as  is  possible.  Scientific  progress,  like 
industrial  progress,  comes  largely  through  specialization  and  the 
division  of  labor.  Man  cannot  profitably  study  things  in  general. 
What  it  does  mean  is  that  there  is  some  territory  common  to  all 
these  sciences,  and  that  occasionally  the  economist  is  forced  to 
pass  ethical  judgment  and  to  decide  political  questions.  In  the 
consideration  of  railway  rates,  for  instance,  the  economist  is  not 
only  compelled  to  pass  judgment  upon  what  is  just  and  reasonable, 
but  he  discovers  upon  investigation  that  by  common  consent  what 
is  fair  or  reasonable  is  decided  largely  upon  economic  grounds. 
The  same  is  true  of  the  apportionment  of  taxes,  in  which  subject 
ethical,  legal,  and  economic  questions  are  inextricably  interwoven. 
Commercial  policies,  restrictive  regulations,  and  sumptuary  laws 
have  been  the  very  stuff  and  subject-matter  of  the  science  of  eco- 
nomics from  its  very  beginning.  In  analyzing  the  progress  of 
the  past  or  the  conditions  of  the  present,  we  are  forced  to  pass 
judgment  upon  the  success  or  failure  of  many  laws  and  policies 
which  are  still  in  force  or  under  active  discussion.  Many  of  these 
must  be  indorsed  or  repudiated  either  solely  or  largely  upon 
economic  grounds;  and  because  of  these  facts,  the  economist  can- 
not, even  if  he  would,  refrain  from  passing  judgment  upon  laws 
and  political  policies.  Nevertheless,  as  was  stated  before,  eco- 
nomics does  not  undertake  the  complete  and  systematic  study  of 
law,  ethics,  and  politics,  and  its  conclusions  must  almost  always 
be  supplemented  by  non -economic  considerations  which  the 
economist  may  not  have  taken  into  account. 

In  the  preface  to  the  first  edition  of  his  Principles  of  Economics,  Professor 
Marshall  seems  to  dissent  from  the  views  here  expressed,  maintaining  that 
"  the  laws  of  economics  are  statements  of  tendencies  expressed  in  the  indica- 
tive mode  and  not  ethical  precepts  in  the  imperative."  But  even  this  most 
cautious  and  consistent  of  economists  cannot  refrain  from  laying  down 
ethical  precepts  in  many  parts  of  his  work.  On  almost  the  very  last  page 
he  declares  that :  "  The  most  imperative  duty  of  this  generation  is  to  provide 
for  the  young  such  opportunities  as  will  both  develop  their  higher  nature,  and 
make  them  efficient  producers.  And  an  essential  condition  to  this  end  is 
long-continued  freedom  from  mechanical  toil ;  together  with  abundant 
leisure  for  school  and  for  such  kinds  of  play  as  strengthen  and  develop  the 
character."  * 

1  Marshall,  Principles  of  Economics,  5th  ed.,  p.  720. 


THE   NATURE   AND   SCOPE   OF   ECONOMICS  15 

Principal  Divisions  of  Economics.  —  This  view  of  the  inevitably 
practical  character  of  economic  science  is  carried  out  in  the  treat- 
ment of  the  subject  in  the  following  pages.  The  history  and  evo- 
lution of  economic  society,  sketched  in  Book  I,  are  followed,  in 
Book  II,  by  a  discussion  of  the  consumption,  production,  exchange 
and  distribution  of  wealth.  These  subjects  are  treated  in  close 
connection  with  those  illustrative  economic  problems  of  which 
the  so-called  ''economic  theory,"  at  its  best,  is  but  a  more  com- 
prehensive and  consequently  more  abstract  analysis.  Book  III 
has  been  reserved  for  the  subject  of  public  finance,  which,  in  the 
opinion  of  the  authors,  constitutes  as  integral  a  part  of  economic 
science  as  the  subjects  of  money  or  international  trade.  In  Book 
IV  is  given  a  brief  sketch  of  the  history  of  economic  thought. 

QUESTIONS 

1.  What  is  the  most  essential  characteristic  of  economics?    Define  eco- 
nomics. 

2.  Is  man  or  goods  the  more  prominent  thing  in  economic  study?    Does 
economics  teach  the  student  how  to  get  rich  ? 

3.  What  determines  ultimately  whether  a  man  is  poor  or  not?    What 
kinds  of  poverty  are  there  ? 

4.  What  is  meant  by  "dear  labor"?     Is  it   a  good  thing  for  society  in 
general?  for  employers  in  general?  for  an  individual  employer? 

5.  What  is  the  difference  between  natural  and  artificial  selection?   Which 
applies  to  human  society  ? 

6.  Are  practical  ethical  and  political  judgments  the  chief  ends  and  prod- 
ucts of  economic  science  ? 

7.  Is   economics   concerned   with   the   negro  question?  asset   currency? 
prohibition?    anti-trust  laws?  race  suicide?  protection? 

REFERENCES 

CAIRNES,  J.  E.     The  Character  and  Logical  Method  of  Political  Economy. 
COSSA,  L.     An  Introduction  to  the  Study  of  Political  Economy. 
INGRAM,  J.  K.     .4  History  of  Political  Economy.     Chap.  VII. 
KEYNES,  J.     The  Scope  and  Method  of  Political  Economy. 
MARSHALL,  ALFRED.     Principles  of  Economics,  5th  ed.,  Appendix  C. 
MILL,  J.  S.     Essays  on  Some  Unsettled  Questions  of  Political  Economy. 
SIDGWICK,  HENRY.     The  Scope  and  Method  of  Economic  Science. 
WAGXER,  A.     "  On  the  Present  State  of  Political  Economy."      Quarterly 
Journal  of  Economics,  Vol.  I. 


CHAPTER   II 

THE    CHARACTERISTICS   OF    THE    PRESENT    ECONOMIC 

SYSTEM 

IT  is  the  object  of  the  present  chapter  to  give  a  descriptive 
survey  of  the  fundamental  institutions  and  forces  of  the  existing 
economic  order. 

Our  Environment.  —  Lying  back  of  all  of  our  economic  activity 
is  the  fact  that  we  live  in  an  environment  in  which  the  things  that 
we  desire  are  not  furnished  spontaneously  in  unlimited  quantities. 
Whether  it  be  looked  upon  as  due  to  the  niggardliness  of  nature 
or  to  the  insatiability  of  human  wants,  the  fact  is  that,  for  the  most 
part,  the  material  things  that  we  use  must  be  economized.  We 
must  put  forth  effort  and  exercise  self-denial  in  order  to  enjoy 
the  good  things  of  life.  Those  human  arrangements  which  help 
to  determine  how  much  of  effort,  of  self-denial,  and  of  enjoyment 
is  to  fall  to  the  lot  of  each  of  us  are  the  characteristics  to  which 
we  now  turn  our  attention.  There  are,  however,  a  number  of 
social  institutions  which  do  not  fall  within  the  scope  of  the  pres- 
ent chapter.  We  deal  here  only  with  the  social  conditions  directly 
underlying  our  economic  activity,  which  is  but  one  aspect  of  our 
social  life.  We  must  leave  to  the  sociologists  and  other  students 
of  society  a  discussion  of  such  topics  as  the  family,  religion,  mo- 
rality, ceremonial  institutions,  and  the  nature  of  government, 
although,  to  be  sure,  these  also  have  their  effect  upon  the 
economic  sphere  and  are  in  turn  affected  by  it.  In  the  present 
chapter  also  we  omit  a  study  of  the  economic  significance  of  our 
physical  environment,  which  receives  independent  treatment  in 
books  on  economic  geography. 

Private  Enterprise  and  State  Activity.  —  We  live  in  an  age  when 
private  enterprise,  for  the  most  part,  is  relied  upon  to  furnish  us 

16 


THE   PRESENT   ECONOMIC   SYSTEM  17 

with  the  necessities  and  enjoyments  of  life.  The  cultivation  of 
the  soil,  the  exploitation  of  the  mines,  transportation,  the  various 
stages  of  manufacture,  and  the  distribution  of  the  finished  prod- 
uct are  all  left  mainly  1  to  private  initiative.  The  discovery  of 
new  processes,  invention,  and  experimentation  are  carried  on 
mostly  by  private  individuals  or  corporations  who  take  upon  their 
own  shoulders  the  risk  of  failure.  The  State,  on  the  other  hand, 
participates  in  this  activity  in  a  variety  of  ways.  It  maintains 
order,  promotes  the  public  health  and  safety,  provides  roads,  and 
takes  charge  of  some  industries  completely.  In  its  educational 
institutions  the  State,  through  its  agents,  undertakes  various  ex- 
periments, and  encourages  the  growth  and  diffusion  of  knowl- 
edge, an  indispensable  condition  of  continuous  advancement  of 
our  economic  life.  The  state  university  and  the  experiment  farms 
may  be  mentioned,  and  also  the  large  and  extremely  useful  De- 
partment of  Agriculture  of  the  United  States,  with  its  annual 
expenditure  now  exceeding  six  million  dollars.  Certainly  in  the 
vast  majority  of  the  enterprises  with  which  we  are  familiar,  pri- 
vate and  public  activities  are  combined  in  varying  proportions. 

Let  us  take  the  case  of  an  industry  which  is  as  nearly  private, 
perhaps,  as  any  we  can  find,  —  that  of  agriculture,  —  and  notice 
the  part  which  public  activities  play  in  securing  the  farmer's  re- 
sult. First,  we  may  say  that  the  farmer  owns  the  farm  that  he 
cultivates;  this  is  private  property.  But  how  comes  it  that  the 
farm  is  his?  Why  does  not  a  stronger  man  drive  him  off  and 
take  the  farm  himself  ?  Plainly  because  the  State  protects  him  in 
the  possession  of  the  farm.  When  he  bought  the  farm,  he  took 
his  deed  to  a  government  official,  who  recorded  it,  and  thus  gave 
him  an  additional  guarantee  of  possession.  A  neighbor's  dog 
kills  his  sheep,  and  an  appeal  to  the  State  compels  the  neighbor 
to  redress  the  grievance.  Another,  far  below,  dams  a  river  and 
backs  the  water  up  so  that  it  overflows  his  land.  Another  appeal 
to  the  State  removes  the  dam  or  secures  compensation.  When 
wheat  is  raised,  the  farmer  hauls  it  to  market  by  a  road  built,  not 
by  private,  but  by  public,  activity.  The  railway  lowers  the  price 

1  This  applies  especially  to  the  United  States  and  England  so  far  as  transpor- 
tation is  concerned ;  it  would  scarcely  hold  true  of  the  world  as  a  whole. 
C 


l8  OUTLINES   OF  ECONOMICS 

of  his  wheat  by  a  discriminating  rate,  and  again  government  in- 
terferes in  his  behalf.  But  manifold  and  important  as  are  the 
regulations  of  the  government,  State  activity  seems  very  much 
restricted  when  we  reflect  that  it  might  extend  over  the  entire 
industrial  field.  To-day  the  distinctive  characteristic  of  our  eco- 
nomic life  is  private,  not  public,  enterprise. 

Division  of  Labor  and  Exchange.  —  It  is  commonly  taken  for 
granted  that  every  man  should  prepare  himself  for  some  special 
occupation,  that  one  should  plow  while  another  builds  or  sings. 
Hardly  any  civilization  seems  possible  without  some  industrial 
specialization,  but  our  own  age  is  peculiar  on  account  of  the  ex- 
tent to  which  this  has  been  carried.  The  introduction  of  machin- 
ery and  the  development  of  large-scale  production  have  split  up 
so  minutely  the  work  of  men  that  the  products  which  they  turn 
out  are  not  only  not  of  immediate  use  to  themselves  in  most  cases, 
but  they  are  also  useless  to  any  one  else  until  combined  with  the 
results  of  other  men's  labor,  often  performed  years  before  or  after- 
wards. It  is  a  long  and  complicated  process  from  the  man  who 
mines  the  ore  which  is  to  reappear  in  a  steel  plow,  to  the  man  who 
bakes  the  bread.  The  effects  of  this  specialization  of  employ- 
ment are  far-reaching :  — 

(i)  It  implies  the  exchange  of  goods.  If  we  produce  things 
we  do  not  need,  we  must  find  some  one  else  who  does  want  them 
and  some  one  who  has  the  things  we  desire.  Money,  banks,  and 
transportation  agencies  could  largely  be  dispensed  with  if  each 
family  produced  for  itself  alone.  There  would  be  none  of  the 
complex  problems  that  center  about  the  question  of  how  much 
each  of  us  is  to  receive  in  exchange  for  his  services.  One  of  the 
striking  characteristics  of  this  process  of  exchange  is  the  great 
extent  to  which  it  is  automatic.  There  is  no  government  official 
whose  business  it  is  to  discover  how  much  of  each  commodity 
will  be  needed,  and  to  direct  that  that  amount  shall  be  produced.1 
Men  are  legally  allowed  to  engage  in  almost  any  undertaking  that 
attracts  them,  and  yet  we  take  it  for  granted  that  somehow  things 
will  get  produced  in  the  proper  proportions.  A  hundred  men  are 

1  The  government  does  help,  however,  in  collecting  and  publishing  information, 
as  in  the  case  of  crop  reports. 


THE   PRESENT   ECONOMIC   SYSTEM  19 

set  to  work  in  a  factory  making  nothing  but  hats,  many  more 
than  they  or  their  friends  can  use,  but  the  manager  has  faith  that 
heads  will  be  found  to  wear  them  all.  Farmers  confidently  pro- 
ceed to  raise  wheat,  never  troubling  themselves  about  the  grind- 
ing and  baking.  Neither  workmen  nor  employers  in  general 
know  why  wages  are  as  they  are.  Men  lend  money  or  goods,  now 
for  one  price,  now  for  another,  but  few  know  why  they  demand 
interest  or  why  the  rate  changes.  These  processes  go  on  visibly 
before  us,  but  the  governing  laws  are  hidden  except  to  the  care- 
ful investigator.  In  this  respect  they  are  like  the  laws  of  physi- 
ology. We  eat  and  digest  our  food,  but  how  many  people  know 
how  or  why  digestion  takes  place?  It  is  easy,  however,  to  over- 
emphasize this  idea,  for  a  great  deal  of  our  economic  activity  is 
conscious  and  volitional.  When  we  decide  to  make  a  law  or  levy 
a  tax,  we  do  it  consciously,  considering  arguments,  and  finally 
will  the  thing  in  question.  Further,  in  the  large  business  con- 
solidations, much  knowledge  regarding  the  course  of  trade  is 
obtained  directly  through  special  agents  or  reports  and  is  made 
the  basis  of  conscious  action. 

(2)  Specialization  of  work  and  exchange  of  goods  just  referred 
to,  necessarily  implies  mutual  dependence.  Instead  of  a  number 
of  distinct,  self-sufficient  units,  we  have  a  coherent  society  where 
one  individual  relies  upon  many  others  to  complete  his  own  one- 
sided economic  activity.  A  strike  of  the  street  car  employees,  or 
of  the  teamsters,  or  the  destruction  of  an  electric  lighting  plant, 
would  each  send  a  shock  of  inconvenience  through  a  community. 
A  prolonged  railway  strike  would  be  felt  as  a  national  misfortune. 
Indeed,  this  interdependence  is  international  in  its  scope.  Eng- 
land relies  on  other  nations  to  send  her  food  in  exchange  for  her 
manufactured  products,  and  many  a  German  workman  would  be 
in  distress  if  there  should  be  a  sudden  failure  in  our  cotton  crop. 

Economic  Classes.  —  In  part,  also,  the  specialization  of  work  is 
responsible  for  the  division  of  society  into  classes,  but  only  in 
part.  The  difference  in  the  work  of  the  carpenter,  machinist,  or 
railway  brakeman  does  not  result  in  the  formation  of  classes  of  a 
higher  and  lower  rank.  On  the  other  hand,  the  professional  brain 
worker  enjoys  some  social  esteem  that  does  not  fall  to  the  lot  of 


20  OUTLINES  OF  ECONOMICS 

the  manual  worker.  But  doubtless  the  most  important  basis  of 
social  classification  is  the  possession  of  wealth.  The  power  to 
spend  freely,  while  not  the  only  test,  is  to-day  the  most  widely  rec- 
ognized test  of  social  status,  regret  it  as  we  may. 

Private  Property.  —  We  proceed  now  to  examine  the  founda- 
tion stones  of  this  system  of  private  enterprise.  Private  property 
is  the  most  important  of  these. 

The  leading  English  writers  of  economic  treatises  have  usually  taken  the 
institution  of  private  property  as  something  to  be  assumed  as  a  starting 
point  in  their  discussions.  John  Stuart  Mill,  indeed,  made  an  excellent 
beginning  in  the  discussion  of  property  and  inheritance  in  his  Principles  of 
Political  Economy,  but  other  English  writers  have  not  generally  followed 
up  his  lead.  It  is  to  the  merit  of  the  German  writers  that  they  have  critic- 
ally examined  these  fundamental  institutions  in  their  economic  bearings. 
The  work  of  Professor  Adolph  Wagner  may  be  mentioned  especially  in  this 
connection. 

For  our  present  purpose  we  may  define  private  property  as.  the 
exclusive  control  over  valuable  things  by  private  persons.  It  is 
to  be  distinguished  from  mere  possession.  The  possessor  has  the 
use  of  the  thing  for  the  time  being,  but  unless  he  is  at  the  same 
time  the  owner,  he  is  dependent  upon  the  will  of  another  for  the 
use  of  it.  Ownership  implies  the  right  of  excluding  other  per- 
sons from  the  enjoyment  of  a  thing.  The  exclusive  right  must 
be  recognized  and  guaranteed  effectively  by  third  parties.  If  I 
defend  my  exclusive  right  of  control  over  some  valuable  thing 
against  your  claim  simply  by  the  strength  of  my  right  arm,  I  have 
not  thereby  established  the  right  of  private  property.  My  ex- 
clusive right  of  control  must  be  recognized  by  others  and  must 
be  maintained  by  them.  Over  against  private  property  we  have 
public  property,  and  there  are  some  things,  such  as  air,  which 
fall  in  neither  of  these  categories.  The  sphere  of  private  property 
at  present  includes,  not  only  food,  clothes,  and  other  things  of 
personal  use,  but  it  also  includes  the  instruments  of  production 
—  land,  buildings,  and  machinery.  In  the  most  important  pro- 
ductive processes  the  tools  are  in  general  not  owned  by  the  per- 
sons who  use  them.  Hence  our  present  wage  system. 

It  may  be  said  that  property  is  the  chief  seat  of  social  authority.  As 
property  carries  with  it  the  exclusive  right  to  control  things,  others  may  have 


THE   PRESENT  ECONOMIC  SYSTEM  21 

access  to  these  things  only  on  conditions  named  by  their  owners.  If 
we  look  about  us,  we  find  men  organized  and  acting  together  under 
direction  for  purposes  of  production.  In  a  factory  we  find  an  organization 
of  men  like  that  of  an  army.  We  discover  men  moving  here  and  there  and 
performing  arduous  tasks  in  obedience  to  command.  If  we  examine  the 
nature  of  the  authority  which  some  thus  exercise  over  others,  we  shall  find 
that  it  resides  in  property.  The  law  of  the  land  to  some  extent  establishes 
the  authority  of  man  over  man ;  but  where  one  man  obeys  another  because 
the  law  in  so  many  words  tells  him  to  do  so,  we  find  a  hundred  men  obeying 
others  because  these  others  have  the  authority  which  resides  in  exclusive 
control  over  valuable  things.  Indirectly  this  latter  sort  of  authority  rests 
back  upon  the  laws  in  so  far  as  these  are  responsible  for  the  establishment  of 
property.  But  the  chief  seat  of  authority  in  society  is  based  only  indirectly 
upon  the  government ;  it  rests  immediately  upon  private  property. 

Inheritance.  —  Inheritance  is  often  regarded  as  a  necessary  part 
of  the  right  of  private  property,  and  it  is  true  that  the  entire  abo- 
lition of  the  right  of  inheritance  would  result  in  a  great  enlarge- 
ment of  the  public  sphere  of  property  at  the  expense  of  the  private 
sphere,  unless  gifts  were  made  to  accomplish  the  same  object  as 
the  system  of  inheritance.  But  strictly  speaking,  we  have  here  to 
do  with  two  rights.  Private  property  is  an  exclusive  right  of  con- 
trol, whereas  inheritance  is  concerned  with  the  transmission  of 
this  right  from  one  generation  to  another. 

As  in  the  case  of  private  property  itself,  the  right  of  inheritance 
is  not  recognized  to-day  as  an  absolute  one.  Detailed  regulations 
exist  on  our  statute  books  regarding  the  descent  of  property  where 
no  will  is  made,  and  also  regarding  the  making  of  wills,  and  there 
is  an  increasing  tendency  to  limit  the  right  of  inheritance  by  taxa- 
tion. Some  features  of  the  present  law  of  inheritance  well  illus- 
trate the  tendency  of  institutions  to  persist  after  the  conditions 
that  gave  rise  to  them  have  disappeared.  The  recognition  which 
we  give  to  the  claims  of  very  distant  relatives  to  a  share  in  an 
estate  where  there  are  no  near  relatives,  and  where  no  will  has 
been  made,  had  its  origin  at  a  time  when  blood  relationship  played 
a  much  more  important  part  in  society  than  it  does  at  present. 

Contract.  —  Scarcely  second  to  the  right  of  private  property  is 
the  right  of  contract,  for  the  maintenance  of  which  we  are  equally 
dependent  on  the  State.  Some  sort  of  contract  lies  at  the  basis 
of  all  associated  activity.  To  secure  the  condition  of  such  activity, 


22  OUTLINES   OF  ECONOMICS 

it  is  necessary,  first,  that  men  should  be  allowed  to  bind  them- 
selves; and  second,  that  they  should  be  compelled  to  respect  the 
agreement  thus  entered  into.  The  entrance  into  a  valid  contract 
is  ordinarily  voluntary,  but  once  entered  into  with  due  formality, 
the  State  will  use  its  superior  power  to  enforce  it.  To  the  anar- 
chistic mind  this  seems  oppressive,  and  it  must  be  admitted  that 
a  state  of  society  is  conceivable  in  which  the  element  of  force 
would  be  removed  from  the  idea  of  contract,  but  something  else 
would  have  to  be  substituted  to  make  the  keeping  of  agreements 
the  general  rule.  There  are  doubtless  many  people  living  to-day 
with  whom  the  feeling  of  honor  or  fear  of  social  disapprobation 
would  be  sufficient  for  the  enforcement  of  contracts,  just  as  these 
persons  might  not  need  the  threat  of  a  jail  sentence  to  keep  them 
from  stealing. 

The  economic  ties  which  hold  men  together  in  industrial  society  on  their 
legal  side  are  very  generally  contracts.  The  organization  of  an  industrial 
corporation  implies  many  contracts.  Our  property  is  acquired  very  largely 
through  contract,  and  through  contract  we  determine  the  conditions  under 
which  we  do  our  work,  such  as  the  length  of  the  working  day.  The  conti- 
nuity of  our  economic  life  rests  upon  contracts,  which  bind  together  past, 
present,  and  future.  Still,  all  that  we  have  by  no  means  comes  to  us  through 
contract.  "Contract"  does  not  exhaust  the  significance  of  parentage,  home, 
and  education,  and  much  wealth  changes  hands  through  gifts  and  inheritance. 

Vested  Interests.1  —  A  few  words  should  be  said  about  vested 
interests.  Vested  interests  may  be  denned  as  pecuniary  interests 
which  are  legally  recognized  to  be  such  that  they  cannot  be  im- 
paired by  public  action  without  indemnification.  Vested  inter- 
ests generally  arise  through  property  and  contract.  Outside  of 
property  and  contract,  however,  there  may  be  vested  interests. 
Leeds  was  compelled  by  a  feudal  arrangement  to  grind  its  corn, 
grain,  and  meal  at  the  lord's  mill  till  well  on  in  the  last  cen- 
tury, and  finally  had  to  pay  £1 3,000  to  terminate  this  obligation. 
When  Prussia  bought  the  railways,  the  railway  presidents  were 
indemnified  for  the  loss  of  their  positions  by  large  payments;  in 
other  words,  their  offices  were  looked  upon  as  vested  interests. 
England  is  the  classic  land  of  vested  interests.  An  office  in  the 
army  was  until  recently  looked  upon  as  such,  and  so  was  an 

'The  term  "  vested  rights  "  is  also  used. 


THE   PRESENT   ECONOMIC   SYSTEM  23 

appointment  in  the  Established  Church.  It  is  generally  held  that 
saloon  keepers  in  England  have  a  vested  interest  in  their  busi- 
ness, so  that  they  must  be  indemnified  if  their  licenses  are  taken 
from  them.  Workingmen  have  frequently  claimed  that  they  have 
a  vested  interest  in  the  advantages  which  their  acquired  skill  gives 
them,  and  consequently  that  if  through  industrial  changes  this 
skill  ceases  to  be  of  as  great  value  as  formerly,  they  ought  to  be 
indemnified  and  in  some  way  their  former  income  continued. 
This  claim  of  the  workingmen,  however,  unlike  many  other  claims 
put  forward  in  the  name  of  vested  interests,  has  not  received  rec- 
ognition, either  by  Parliament  or  the  courts.  Vested  interests, 
apart  from  property  and  contract,  are  of  less  significance  in  the 
United  States  than  in  most  countries,  but  they  may  become  of 
more  significance  in  the  future. 

Freedom.  — The  words  "  liberty  "  and  "  freedom  "  have  given  rise 
to  some  of  the  deepest  philosophical  discussions,  but  we  may  avoid 
confusion  if  we  say  that  the  freedom  to  do  certain  things  is  legally 
guaranteed  at  the  present  time,  such  as  moving  from  one  part 
of  the  country  to  another,  choosing  one's  own  occupation,  and 
acquiring  property.  These,  together  with  the  absence  of  chattel 
slavery  and  imprisonment  for  debt,  are  characteristic  features  of 
the  present  economic  order  as  distinguished  from  past  conditions. 
The  right  to  manufacture  and  sell  what  and  when  one  pleases  is  a 
comparatively  recent  one.  It  has  often  been  greatly  limited  by 
despotic  governments,  and  the  right  has  been  made  a  matter  of 
sale  for  the  purpose  of  raising  revenue.  Most  such  limitations 
have  been  of  the  nature  of  abuses,  and  our  own  time  has  seen  the 
abolition  of  an  immense  number  of  hampering  and  vexatious  re- 
strictions designed  for  plunder  rather  than  for  the  promotion  of 
private  enterprise.  So  far  as  the  absence  of  legal  restrictions  on 
the  actions  of  individuals  is  concerned,  the  past  century  has  been 
distinctively  an  age  of  liberty. 

Restrictive  laws,  however,  are  not  the  only  limitations  on  our 
freedom  of  action.  The  system  of  private  property  itself  means 
that  certain  individuals  in  the  community  have  power  to  command 
other  people  to  work,  and  the  lack  of  an  income  under  our  present 
regime  implies  the  lack  of  the  real  freedom  to  do  things.  The 


24  OUTLINES   OF  ECONOMICS 

cost  of  a  railway  ticket  may  be  quite  as  effective  as  a  legal  barrier 
would  be  in  preventing  movement  from  one  state  to  another.  It 
is  said  that  we  are  free  to  acquire  unlimited  property.  True,  the 
law  does  not  expressly  prohibit  such  acquisition,  but  as  a  matter 
of  fact  many  persons  do  not  acquire  much  property.  Again,  we 
say  involuntary  servitude,  except  as  punishment  for  crime,  has  been 
abolished,  yet  men  are  compelled  to  work  by  the  threat  of  eco- 
nomic distress,  in  most  cases  quite  as  effectively  as  by  means  of 
the  slave-driver's  whip,  for  the  counterpart  of  legal  freedom  is 
the  economic  responsibility  of  the  individual.  "Sink  or  swim," 
says  the  State  to  the  millions  struggling  for  worldly  goods.  That 
is  the  end  of  the  matter  according  to  the  laissez-faire  theory.  The 
modern  State  helps  men  to  learn  to  swim.  Again,  the  choice  of  an 
occupation  is  free  according  to  the  law,  but  we  may  find  that  a 
long  and  expensive  course  of  training  is  necessary,  or  we  may  be 
compelled  to  conform  to  trades-union  regulations,  and  always  it  is 
necessary  to  find  some  one  who  deems  our  services  valuable.  The 
right  to  establish  enterprises  is  granted  to  all  alike  according  to 
the  law,  but  to-day  it  would  be  difficult  and  hazardous  to  embark 
upon  the  refining  of  oil  or  the  manufacture  of  steel.  Practically, 
the  freedom  to  establish  new  enterprises  has  been  growing  less 
and  less  in  this  era  of  large-scale  production. 

Competition  and  Markets.  —  As  a  result  of  the  legal  conditions 
that  have  been  mentioned,  we  find  men  engaged  in  many  kinds 
of  rivalry.  Our  economic  society  is  often  called  "competitive" 
for  this  reason.  But  when  this  term  is  used,  not  all  forms  of 
rivalry  are  meant,  for  even  if  private  property  and  free  contract 
were  abolished,  some  form  of  struggle  might  still  persist.  There 
might  still  be  conflicts  between  races  and  nations,  and  the  men  of 
any  single  nation  might  still  vie  with  one  another  to  prove  their 
superiority  in  the  eyes  of  womankind  or  to  gain  positions  of  pub- 
lic honor  and  power.  The  kind  of  competition  which  is  distinc- 
tive of  the  present  economic  order  is  the  all-pervading  endeavor 
to  obtain  the  largest  possible  amount  of  wealth  in  exchange  for 
commodities  produced  or  services  rendered.  If  we  except  the 
idlers,  the  parasites,  and  the  cheaters,  men  are  everywhere  en- 
deavoring to  discover  what  other  people  want  urgently,  and  then 


THE   PRESENT   ECONOMIC   SYSTEM  25 

to  satisfy  that  want  in  the  most  efficient  manner  possible.  On  the 
other  hand,  they  attempt  to  give  as  little  as  possible  of  their  own 
products  in  exchange  for  the  things  they  themselves  desire.  Busi- 
ness competition  thus  has  two  sides:  rivalry  in  rendering  a  serv- 
ice, and  alertness  in  exacting  a  return.  Each  individual  takes 
part  in  the  competitive  contest  in  two  ways:  first,  as  a  seller  of 
goods  or  services,  in  which  case  he  finds  that  others  are  anxious 
to  render  the  same  service;  and  second,  as  a  buyer  of  the  things 
he  wants,  in  which  case  he  finds  that  these  same  things  are  sought 
after  by  other  people. 

The  intensity  of  the  competitive  struggle  is  subject  to  a  good 
deal  of  variation.  At  times  it  may  be  characterized  as  cut-throat, 
where  the  slashing  of  prices  has  for  its  object  the  elimination  of 
one  or  more  of  the  contestants.  But  the  rivalry  is  not  necessarily 
so  fierce.  In  some  lines  of  business  many  competitors  may  con- 
tinue to  exist  side  by  side  indefinitely,  each  competitor  being  con- 
fronted by  the  ever  present  threat  that  if  his  service  becomes  very 
poor,  some  other  man  will  outstrip  him.  Various  as  may  be  the 
character  of  competition,  now  predator)',  now  a  friendly  rivalry, 
there  is  no  resting  place  in  the  contest  unless  one  secures  some 
special  privilege  as  a  shelter.  He  who  is  energetic,  and  wins  suc- 
cess in  a  certain  line  of  business,  must  continue  to  defend  himself 
from  a  host  of  imitators  who  are  anxious  to  snatch  his  gains  from 
him.  Most  of  the  competitors  are  successful  in  getting  something, 
some  more  than  others,  but  many  fail  altogether.  These  last,  the 
inefficient,  whether  made  so  by  sickness,  by  inherited  weakness, 
or  by  lack  of  proper  training,  fall  by  the  wayside  and  must  be  cared 
for  by  private  charity  or  by  the  State.  The  process  is  cruel  in 
many  of  its  details,  but  there  is  also  a  beneficent  aspect  in  the 
sifting  out  of  the  incompetent  and  in  the  encouragement  of  the 
strong. 

Here,  again,  reference  may  be  made  to  the  automatic  character 
of  the  present  industrial  system.  It  is  through  competition  and 
bargaining  in  the  market  that  a  price  is  fixed,  and  it  is  to  the  vari- 
ations in  this  price  that  business  men  look  for  indications  as  to 
what  people  want  rather  than  to  the  reports  of  some  government 
official,  although  such  reports  are  of  some  assistance.  Price  is 


26  OUTLINES   OF  ECONOMICS 

the  universal  barometer  that  indicates  changes  in  the  demand  for 
goods  of  all  kinds. 

Competition  has  been  spoken  of  as  a  struggle,  a  contest,  ac- 
companied by  success  and  failure,  elation  and  disappointment. 
But  the  State  sets  limits  to  the  rivalry  —  it  makes  regulations  and 
acts  as  an  umpire  to  compel  fair  play.  It  attempts  to  eliminate 
fraud  and  brute  force;  it  trains  the  rising  generations  for  an  en- 
trance into  the  struggle  by  a  system  of  free  education;  it  insists 
that  no  person  shall  sacrifice  the  life  and  limb  of  another  in  the 
rush  for  wealth;  and  it  protects  children  and  women  when  they 
seem  compelled  to  labor  under  unhealthful  conditions.  Those  who 
fail  entirely  in  the  struggle  it  tries  to  rescue  from  suffering.  In 
short,  the  State,  as  will  be  explained  more  fully  in  a  later  chap- 
ter, aims  to  raise  the  plane  of  competition,  changing  it  from  bru- 
tal warfare  into  a  contest  in  which  there  are  prizes  for  all,  but  in 
which  the  prizes  are  graded  according  to  the  energy  and  ability 
of  the  contestants. 

Cooperation.  —  The  statement  that  our  age  is  one  of  competi- 
tion is  misleading  if  it  gives  the  impression  that  every  individual 
is  continually  struggling  against  all  of  his  fellows.  On  the  con- 
trary, the  achievements  of  modern  industrial  civilization  would  be 
impossible  without  a  far-reaching  cooperation  between  individ- 
uals. Employers  and  employees  may  quarrel  and  bargain  about 
the  wage  contract,  but  when  they  have  settled  their  relations  for  a 
week  or  a  year,  they  become  cooperators  during  that  period  in 
the  conduct  of  the  business  enterprise  in  which  they  are  engaged. 
Again,  there  is  an  unconscious  cooperation  between  those  who 
work  upon  a  commodity  in  the  different  stages  of  the  process  from 
raw  material  to  finished  product.  The  division  of  labor  itself 
necessarily  implies  cooperation.  Competition  merely  determines 
the  conditions  on  which  the  cooperation  takes  place.  If  these 
conditions  could  be  determined  in  some  other  manner,  it  would 
be  possible  to  conceive  of  the  elimination  of  competition  from  our 
industrial  system,  but  cooperation  is  so  vital  and  fundamental 
that  its  elimination  would  mean  a  return  to  barbarism. 

Monopoly.  —  Everywhere  in  the  industrial  field  the  tendency 
toward  monopoly  is  present.  Business  men  endeavor  so  far  as 


THE   PRESENT   ECONOMIC   SYSTEM  27 

possible  to  shelter  themselves  from  the  effects  of  the  competitive 
struggle  by  means  of  some  privilege,  but  if  none  is  to  be  found, 
and  if  competition  becomes  very  keen,  they  endeavor  to  combine 
with  other  business  men.  But  while  this  attempt  to  escape  com- 
petition is  universal,  it  is  only  under  certain  conditions  that  it  is 
at  all  likely  to  succeed.  The  success  is  least  in  agriculture  and  in 
the  mercantile  business,  where  new  enterprises  are  started  rather 
easily  because  no  special  privileges  stand  in  the  way  and  because 
no  very  large  capital  is  required  to  work  efficiently.  It  is  greatest 
in  mining  and  transportation,  where  special  privileges  are  present 
and  where  large  capital  is  required.  Scarcely  anywhere  is  it  pos- 
sible wholly  to  escape  competition,  and  we  are  still  warranted 
in  speaking  of  the  present  era  as  a  competitive  rather  than  a 
monopolistic  age. 

Side  by  side  with  the  growth  of  monopoly  there  is  an  increase 
in  government  interference  in  industry.  The  desire  of  the  busi- 
ness man  is  to  be  uncontrolled,  but  wherever  he  succeeds  in  throw- 
ing off  the  control  exercised  by  his  competitors,  he  inevitably 
substitutes  that  of  the  government  official. 

Custom.  —  Custom  plays  an  important  part  in  our  economic 
activity  as  well  as  in  every  other  department  of  social  life,  although 
its  sway  is  not  so  marked  as  in  former  ages  or  among  primitive 
peoples.  The  custom  of  giving  gratuities,  or  tip*,  to  servants  is 
in  many  places  so  strong  as  to  have  almost  the  force  of  law.  Again, 
to-day  much  of  our  personal  expenditure  is  controlled  by  what 
custom  has  declared  to  be  proper  rather  than  by  any  act  of  our 
own  individual  reason.  Any  attempt  to  lower  wages  which  would 
make  impossible  the  maintenance  of  a  customary  standard  of  liv- 
ing would  be  stubbornly  resisted.  Custom  is  the  result  of  habit, 
and  is  continually  broken  into  by  our  tendency  to  imitate  a  leader 
who  proposes  a  new  line  of  action.  Recent  events  in  the  spelling 
reform  movement  afford  an  illustration.  While  custom  may  have 
its  beneficent  aspect  in  preventing  hasty  and  impulsive  changes, 
it  frequently  retards  progress  and  causes  our  legislation  and  judi- 
cial decisions  to  lag  behind  industrial  development. 

Authority  and  Benevolence.  —  In  the  preceding  pages  frequent 
reference  was  made  to  the  limitations  upon  the  rights  of  private 


28  OUTLINES  OF  ECONOMICS 

property,  inheritance,  contract,  and  freedom.  Public  authority 
may  be  looked  upon  as  one  of  the  forces  governing  the  economic 
process.  The  conduct  of  private  enterprises  is  continually  being 
interfered  with  by  State  authority.  Legal  rates  of  interest  are 
established,  and  "reasonable"  railway  charges  are  substituted 
for  actual  charges.  The  authoritative  fixation  of  wages  is  a 
future  possibility. 

Benevolence,  or  the  caritative  principle,  may  be  mentioned  as 
another  force  in  economic  society,  modifying  and  supplementing 
in  many  ways  the  work  of  competition. 

QUESTIONS  AND  EXERCISES 

1.  Attempt  to  classify  the  leading  occupations  in  your  city  with  respect 
to  the  social  prestige  attaching  to  them. 

2.  Describe  the  property  relations  existing  in  the  Amana  Society,  or  in 
other  communistic  groups. 

3.  What  regulations  concerning  the  inheritance  of  property  are  in  force 
in  your  state  ? 

4.  To  what  extent  are  gambling  contracts  valid  ? 

5.  Compare  the  legal  freedom  of  workingmen  to-day  with  the  conditions 
described  in  the  Wealth  of  Nations,  Book  I,  Chap.  X,  Part  II. 

REFERENCES 

BAKER,  C.  W.     Monopolies  and  the  People,  Chaps.  X  and  XI. 

BLISS,  W.  D.  P.      Encyclopedia  of  Social  Reform  (new  ed.),   article   on 

Amana  Community.      See  also  on  sample  subject,   Ely,  R.  T.,  in 

Harper's  Monthly  Magazine,  October,  1902. 

ELY,  R.  T.  Evolution  of  Industrial  Society,  Part  II,  Chaps.  I,  VII,  or  XI. 
GREEN,  T.  H.  Liberal  Legislation  and  Freedom  of  Contract,  Works,  Vol. 

Ill,  p.  365. 

MILL,  J.  S.     On  Liberty,  Chap.  IV. 

MILL,  J.  S.  Principles  of  Political  Economy,  Book  II,  Chaps.  I  and  II. 
NICHOLSON,  J.  SHIELD.  Principles  of  Political  Economy,  Vol.  I,  Book  II, 

Chaps.  II-VIII. 

PATTEN,  S.  N.     Development  of  English  Thought,  pp.  22-23. 
STEPHENS,  J.  F.     Liberty,  Equality,  and  Fraternity. 

SIDGWTCK,  HENRY.  Principles  of  Political  Economy,  Book  II,  Chap.  XII. 
WEBB,  SIDNEY  and  BEATRICE.  Industrial  Democracy,  Vol.  II,  pp.  562-572. 


CHAPTER   III 
THE   EVOLUTION   OF   ECONOMIC    SOCIETY 

IN  the  preceding  chapter  were  described  the  fundamental  insti- 
tutions of  the  present  economic  order.  Here  a  brief  sketch  will 
be  given  of  the  origin  and  development  of  these  institutions.  Such 
a  study  is  advisable  in  a  general  survey  of  the  field  of  political 
economy  because  many  of  the  problems  and  proposed  reforms 
which  are  met  with  raise  questions  as  to  the  soundness  of  the 
very  foundations  of  our  present  economic  life,  and  these  can  only 
be  understood  when  they  are  viewed  as  historical  products. 

The  evolution  of  economic  society  is  but  one  of  many  stand- 
points from  which  the  development  of  mankind  may  be  consid- 
ered. The  history  of  literature,  the  history  of  government,  the 
history  of  religion,  each  treats  of  man  in  one  line  of  his  activities. 
Many  thinkers  have  considered  the  economic  activities  of  man- 
kind as  the  fundamental  factor  in  social  progress,  determining  in 
the  long  run  even  our  ethical  and  religious  conceptions.  Prob- 
ably human  life  is  too  complex  for  any  such  simple  explanation. 
The  economic  factor,  however,  is  clearly  of  the  most  fundamental 
importance  in  the  sense  that  the  higher  things  in  life  cannot  be 
cultivated  if  man's  entire  time  is  spent  in  getting  a  mere  subsist- 
ence, so  that  economic  progress,  or  gaining  control  over  the  forces 
of  nature,  must  accompany  general  social  advancement,  at  least 
for  the  mass  of  the  community.  Under  primitive  methods  of 
production,  only  a  select  few  can  have  this  leisure  time. 

The  Economic  Stages.  —  Many  attempts  have  been  made  to 
divide  economic  history  into  stages  through  which  mankind  passed 
in  arriving  at  modern  industrial  civilization.  These  attempts  have 
been  the  subject  of  lively  criticism,  but  it  appears  that  the  classifi- 
cation which  in  the  past  has  been  most  widely  used  is  still,  with 

29 


30  OUTLINES  OF  ECONOMICS 

some  modifications,  the  most  serviceable,  and  in  the  main,  this 
will  be  followed  in  the  present  chapter. 

The  basis  of  this  classification  is  the  increasing  power  of  man 
over  nature.  This  is  the  fundamental  fact  in  man's  economic 
development,  and  his  position  in  the  scale  of  economic  civilization 
is  higher  in  proportion  as  this  power  over  nature  increases.  In- 
creasing control  of  nature  is  accompanied  by  changes  in  man 
himself,  especially  by  a  growth  and  diversification  in  his  wants, 
so  that  we  may  say  that  economic  civilization  consists  largely  in 
wanting  many  things  and  in  learning  how  to  make  and  use  them. 
From  this  standpoint  economic  history  may  be  divided  into  the 
following  stages : 

I.  Direct  Appropriation. 

II.  The  Pastoral  Stage. 

III.  The  Agricultural  Stage. 

IV.  The  Handicraft  Stage. 
V.  The  Industrial  Stage. 

I.   DIRECT  APPROPRIATION 

The  economy  of  primitive  man  is  characterized  by  finding  things 
ready  to  use  instead  of  making  them.  It  is  not  intended  to  assert 
that  the  lowest  examples  of  mankind  that  we  know  do  absolutely 
nothing  in  the  way  of  transforming  the  materials  of  nature  for 
use.  The  lowest  types  know  the  use  of  fire  and  have  rude  tools, 
but,  nevertheless,  the  farther  back  we  go,  the  more  direct  do  we 
find  the  reliance  on  nature.  One  cannot  read  descriptions  of  the 
Negritos,  Veddahs,  Fuegians,  or  native  Australians  without  being 
impressed  with  the  similarity  between  the  economy  of  these  peo- 
ples and  that  of  the  lower  animals.  But  there  are  many  tribes 
commonly  regarded  as  savages  that  show  a  great  advancement 
over  those  that  have  been  mentioned.  Among  the  North  Ameri- 
can Indians,  for  example,  we  find  a  rude  sort  of  cultivation  of  the 
soil  along  with  hunting  and  fishing.  Such  soil  cultivation  has 
been  termed  "  hoe-culture,"  and  is  to  be  distinguished  from  agri- 
culture with  the  aid  of  domesticated  animals  found  in  a  later  stage 
of  development. 


THE  EVOLUTION   OF  ECONOMIC   SOCIETY  31 

This  kind  of  agriculture  is  found  in  its  highest  state  of  development  among 
the  negroes  of  Africa.  "  The  ground  for  cultivation,"  says  Ratzel,  "  is  cleared 
by  means  of  fire,  or  with  the  hatchet  or  small  ax.  On  the  east  coast  a  broad 
chopper  with  a  spear-shaped  blade  and  short  handle  is  also  used.  The 
lance  or  spearhead  has,  in  general,  to  serve  many  peaceful  purposes.  Larger 
trees  are  killed  by  barking.  Thorny  branches  are  placed  as  a  border  to  the 
fields,  under  the  shelter  of  which  close,  quick  hedges  gradually  grow  up.  The 
ground  is  broken  and  cleared  of  weeds  with  a  wooden  spade  sharpened  to  an 
edge  at  either  end.  Many  peoples  have  hitherto  not  ventured  to  use  iron 
tools,  since  they  keep  away  the  rain.  When  the  ground  has  been  got  ready, 
somewhere  about  the  beginning  of  the  rainy  season,  the  sower  walks  over 
the  field,  scraping  a  hole  with  his  naked  foot  at  every  step,  into  which  he  lets 
some  grains  fall  from  his  hand ;  the  foot  covers  them  up,  and  if  the  good 
witch  doctor  makes  rain  enough,  and  the  bad  one  does  not  keep  it  back,  there 
is  nothing  more  to  be  done  until  harvest,  unless  to  hoe  the  weeds  once.  .  .  . 
To  the  present  day  the  plow  is  practically  strange  to  them."  * 

The  following  characterization  of  the  economy  of  primitive  man 
applies  with  varying  force  to  the  many  tribes  that  may  be  placed 
in  this  first  stage. 

Characteristics  of  Primitive  Man.  —  The  range  of  wants  is  nar- 
row, as  the  savage  is  almost  completely  satisfied  if  he  obtains  mere 
subsistence  of  the  rudest  sort.  In  the  satisfaction  of  these  few 
wants  he  is,  according  to  our  modern  standards,  remarkably  inef- 
ficient. P>om  the  best  natural  resources  he  manages  to  get  a 
very  poor  living,  depending  as  he  does  largely  on  the  spontaneous 
products  of  nature.  Magic  and  ritual  are  very  generally  relied, 
upon  as  aids  to  wealth  production.  Primitive  man  is  improvi- 
dent, for  he  does  not  feel  keenly  the  uncertainties  of  the  future, 
and  fails  to  make  provision  for  them.  Hence  we  find  him  sub- 
jected to  alternate  periods  of  starvation  and  plenty.  Only  a  scanty 
population  is  possible  in  this  stage,  as  a  tribe  must  have  a  large 
expanse  of  territory  from  which  to  draw  its  sustenance.  The 
place  of  abode  is  easily  changed,  and  warfare  with  neighboring 
tribes  frequent.  Cannibalism  is  found  among  many  primitive 
peoples.  Private  property  in  land  is  absent,  although  the  begin- 
ning of  the  institution  of  ownership  appears  in  the  recognition  of 
the  individual's  right  to  articles  of  personal  use.  There  is  little 
division  of  labor.  What  one  man  can  do,  all  can  do.  The  soil 

1  Ratzel,  History  of  Mankind,  trans,  by  A.  J.  Butler,  Vol.  II,  pp.  380-382. 


32  OUTLINES   OF  ECONOMICS 

cultivation  by  the  women  and  the  specialized  work  of  the  medi- 
cine man  are  exceptions.  As  each  tribe  is  economically  self-suffi- 
cient, the  development  of  trade  is  slight.  The  beginning  of 
slavery  may  be  observed,  but  this  institution  plays  no  impor- 
tant part  in  the  economy  of  primitive  man,  except  among  the  most 
advanced  tribes. 


II.  THE  PASTORAL  STAGE 

In  the  older  accounts  of  economic  evolution,  the  impression  is 
given  that  hunting  peoples  learned  to  domesticate  animals  arid 
then  led  a  pastoral  life,  later  learning  to  subdue  the  vegetable 
kingdom,  and  then  becoming  agriculturalists.  This  view  is  not 
accurate.  It  is  possible  that  the  domestication  of  animals  was 
developed  in  regions  where  considerable  progress  had  been  made 
in  hoe-culture.  As  this  knowledge  spread,  certain  tribes  became 
and  remained  pastoral  nomads  in  regions  where  agriculture  was 
impossible.  But  whatever  the  actual  steps  may  have  been,  the 
pastoral  peoples  represent  a  type  of  culture  that  is  lower  than  that 
of  the  agricultural  stage  (as  distinguished  from  hoe-culture),  and 
higher  than  that  of  the  hunter.  Within  this  stage  also  are  classed 
together  tribes  of  varying  advancement.  Illustrations  of  existing 
pastoral  life  are  found  in  the  tribes  of  central  Asia,  many  of  the 
Arabian  and  African  tribes,  and  the  Todas  of  India.  Attempts 
have  been  made  to  trace  the  pastoral  stage  in  the  early  history  of 
the  Hebrews,  Germans,  Greeks,  and  Britons. 

Characteristics  of  Pastoral  Peoples.  —  Some  marked  features  of 
the  first  stage  are  found  also  among  pastoral  peoples.  A  fixed 
abode  is  not  possible,  as  food  must  be  found  for  the  herds  and  flocks. 
Cities  do  not  develop.  Moreover,  while  the  land  will  now  sup- 
port many  more  inhabitants  per  square  mile  than  before,  much 
land  is  still  needed  for  pasture,  and  there  is  frequent  collision  and 
warfare  between  neighboring  tribes.  It  follows  also  that  there  is 
very  little  private  ownership  of  land  among  these  peoples.  Tribes 
as  a  whole  lay  claim  to  certain  districts  and  try  to  keep  other 
tribes  from  pasturing  on  them.  In  this  stage  there  are  frequently 
individual  accumulations  of  wealth,  consisting  mostly  of  herds  or 


THE  EVOLUTION   OF  ECONOMIC  SOCIETY  33 

flocks,  and  thus  the  contrast  between  rich  and  poor  makes  its  ap- 
pearance. Customary  rules  regarding  the  inheritance  of  wealth 
are  recognized.  But  this  early  wealth  does  not  produce  com- 
merce to  any  considerable  extent,  simply  because  there  is  little 
division  of  labor  either  between  localities  or  within  the  tribe. 


III.  THE  AGRICULTURAL  STAGE 

In  this  stage  there  is  an  enormous  increase  in  man's  power  over 
nature.  The  production  of  wealth  is  increased  especially  by  the 
use  of  animal  power  in  cultivating  the  soil.  One  result  is  to  in- 
crease population.  Land  which  under  the  more  primitive  meth- 
ods of  production  would  give  a  scanty  support  to  a  small  tribe 
for  a  part  of  the  year  will  now  maintain  a  whole  community  with 
a  fixed  abode.  It  is  necessary  for  human  development  that  men 
should  live  in  definite  places  and  have  homes  and  a  country. 
This  results  in  new  relations  between  men,  new  duties,  new  arts, 
and  new  possibilities.  The  beginning  of  the  institution  of  private 
ownership  in  land  falls  within  this  stage,  although  it  is  difficult  to 
trace  the  actual  steps  in  the  process. 

A  most  important  characteristic  of  this  period  is  slavery.  Slav- 
ery begins  long  before  improved  agriculture,  but  it  now  attains 
its  full  magnitude  as  an  institution.  There  have  been  many  dis- 
cussions as  to  whether  slavery  is  right  or  wrong.  It  is  both. 
There  is  a  time  in  human  development  when  slavery  represents  a 
step  in  human  progress.  The  slavery  of  the  early  period  we  are 
now  considering  was  inevitable,  and  is  not  to  be  judged  by  modern 
standards.  We  now  know  that  free  labor  is  better  than  slave 
labor,  especially  in  the  later  stages  of  industrial  development; 
but,  inasmuch  as  primitive  man  is  induced  with  difficulty  to  work 
at  all,  slave  labor  is  a  great  improvement  on  free  idleness. 

Commercial  intercourse  is  still  comparatively  slight  in  this  stage. 
Fixed  residence  develops  village  communities,  and  these  are  econom- 
ically self-sufficient.  They  produce  the  things  that  they  consume, 
and  as  a  rule  have  not  surplus  products  to  dispose  of  to  others. 
Hence  money  does  not  at  this  time  perform  important  functions 
in  the  life  of  every  day.  The  economic  condition  of  Europe  dur- 
D 


34  OUTLINES   OF  ECONOMICS 

ing  the  middle  ages  before  the  growth  of  cities  illustrates  the 
agricultural  stage. 

The  Manorial  Economy  in  England.  —  England  was  almost 
wholly  agricultural  for  three  centuries  following  the  Norman  Con- 
quest. In  the  thirteenth  century  the  population  for  the  most  part 
lived  in  villages  or  manors,  each  controlled  by  a  lord  to  whom 
the  rest  of  the  inhabitants  were  bound  by  customary  rules  to  ren- 
der certain  assistance  in  the  cultivation  of  the  lord's  land.  The 
villagers  were  of  various  classes,  according  to  the  amount  of  land 
which  they  held  and  according  to  the  services  which  they  were 
required  to  perform.  The  land  of  each  tenant  was  not  a  com- 
pact area,  but  was  composed  of  strips  scattered  in  the  three 
great  fields  into  which  the  arable  land  was  divided  for  purposes 
of  crop  rotation. 

Some  handicraftsmen  were  also  found  upon  the  estate,  but  they  do  not 
occupy  an  important  place  in  the  economy  of  the  village.  For  the  most  part, 
they  were  probably  slaves  or  household  servants.  Slaves  in  England  con- 
stituted at  the  time  of  the  Conquest  about  nine  per  cent  of  the  population, 
but  "in  some  of  the  eastern  and  midland  shires  do  not  appear  at  all,  or  fall 
to  a  percentage  of  four  or  five,"  while  they  rise  to  as  much  as  twenty-four 
per  cent  in  other  parts  of  the  country.  "We  cannot  but  explain  this  by  the 
supposition  that  in  the  later  stages  of  the  English  conquest  a  greater  number 
of  the  British  cultivators  were  spared,  so  that  in  these  districts  slaves  came  to 
form  a  considerable  part  of  the  rural  population.  Absolute  slavery,  how- 
ever, disappeared  in  less  than  a  century  after  the  Conquest,  and  the  servi 
became  customary  holders  of  small  plots,  like  the  cotters  elsewhere,  but  on 
more  onerous  conditions."  l 

While  these  manors  were  largely  self-sufficient  in  their  economic 
life,  there  was,  to  be  sure,  some  trade.  England  exported  raw 
products  to  the  continent  and  received  back  some  of  the  finer 
forms  of  manufacture.  But  the  ordinary  needs  of  the  very  frugal 
life  which  the  tenants  had  to  live  were  supplied  by  products  of 
the  village  itself.  During  the  centuries  following  the  Norman 
Conquest  important  changes  took  place  in  the  manorial  system: 
(i)  a  rapid  growth  in  the  number  of  free  tenants;  (2)  the  com- 
mutation of  customary  services  into  fixed  payments  in  money  or 
kind;  and  (3)  the  appearance  of  a  class  of  agricultural  laborers 

1  See  Ashley,  English  Economic  History,  Vol.  I,  pp.  17-18. 


THE  EVOLUTION   OF  ECONOMIC   SOCIETY  35 

dependent  on  the  wages  which  they  received.  In  contrasting  the 
manorial  economy  with  the  village  of  the  present  day,  Professor 
W.  J.  Ashley  has  pointed  out  the  following  differences:  (i)  Now 
farmers  live  in  separate  homesteads  among  the  fields  they  rent, 
but  then  all  the  cultivators  lived  side  by  side  in  the  village  street. 
(2)  Now  each  farmer  follows  his  own  judgment  as  to  his  agricul- 
tural operations,  but  in  this  early  period  he  took  his  share  in  the 
common  method  of  cultivation,  which  was  regulated  by  custom 
enforced  by  the  manor  courts.  (3)  To-day,  if  the  landlord  him- 
self engages  in  farming,  his  management  is  independent  of  that 
of  his  tenants,  but  under  the  manorial  system  he  depended  almost 
exclusively  upon  the  labor  of  his  tenants,  who  contributed  plows, 
oxen,  and  men.  Finally,  (4)  aside  from  the  great  gulf  between 
lord  and  tenants,  there  was  then  no  such  social  separation  between 
the  cultivators  as  there  is  to-day  between  large  and  small  farmers. 
The  manorial  economy  of  England  was  a  type,  though  somewhat 
more  systematically  developed,  of  conditions  on  the  continent  of 
Europe. 

IV.  THE  HANDICRAFT  STAGE 

This  stage  begins  with  the  development  of  towns  as  centers  of 
trade  and  handicraft  in  the  latter  part  of  the  middle  ages,  and  ex- 
tends to  the  introduction  of  power  manufacture  in  the  latter  part  of 
the  eighteenth  century.  During  such  a  long  period  many  changes 
took  place  in  the  economic  life  of  the  people  of  Europe,  but  so 
far  as  the  expansion  and  satisfaction  of  wants  is  concerned,  —  the 
power  over  nature,  —  the  whole  period  is  in  marked  contrast  with 
the  modern  era  of  machine  production. 

Gilds.  —  The  growth  of  trade  in  the  town  brought  with  it  the 
merchant  gild,  the  purpose  of  which  was  to  regulate  the  conduct 
of  trade  and  to  keep  a  monopoly  of  it  for  the  merchants  of  the 
town.  Merchant  gilds  appeared  in  all  the  larger  towns  of  Eng- 
land in  the  twelfth  century.  But  a  new  class  was  developing  in 
the  towns,  —  the  craftsmen  who  were  engaged  in  the  making  of 
things  for  sale.  As  this  handicraft  grew  in  importance,  the  mer- 
chant gild  was  superseded  by  the  craft  gild,  which  in  England 
attained  its  fullest  development  in  the  first  half  of  the  fourteenth 


36  OUTLINES   OF   ECONOMICS 

century.  Each  craft  had  its  gild,  which  specified  in  detail  how 
the  business  should  be  carried  on,  how  many  should  be  admitted 
to  it,  and  how  the  trade  should  be  learned.  This  growth  in  spe- 
cialization meant  also  a  growth  in  trade,  but  in  this  early  part  of 
the  handicraft  period,  commerce  was  much  restricted  as  compared 
with  that  of  the  present  day.  The  towns  made  exchanges  mostly 
with  the  country  surrounding  them,  there  being  as  yet  no  national 
or  world  market  of  any  importance.  Plainly  such  a  general  sys- 
tem of  exchange  cannot  be  carried  on  by  barter,  and  in  this  period 
money  became  increasingly  important. 

The  agricultural  stage  had  in  the  greater  part  of  Europe  cul- 
minated in  the  feudal  system.  The  nobility  maintained  order 
and  attended  to  the  fighting  while  the  serfs  tilled  the  soil.  The 
manufacturing  cities  became  the  rivals  of  the  feudal  lords,  who 
felt  their  power  threatened,  and  hence  they  bitterly  opposed  the 
cities.  The  cities  were  free,  and  the  serfs  who  fled  to  them  were 
accepted  and  made  freemen. 

The  Domestic  System.  —  With  the  beginning  of  the  modern 
period  the  town  system  gave  way  to  a  larger  economy.  The 
towns  lost  the  control  of  trade.  The  gild  system  was  succeeded 
by  the  domestic  system,  which  prevailed  in  England  from  the 
middle  of  the  fifteenth  to  the  middle  of  the  eighteenth  centuries. 
As  in  the  gild  system,  industry  was  carried  on  by  hand  in  a  small 
way,  but  the  functions  of  merchant  and  workman  were  now  sep- 
arated. The  gild  master  sold  the  goods  which  he  produced  in  his 
shop  directly  to  the  customers  who  were  to  use  the  goods,  but 
under  the  domestic  system  the  workman  came  to  be  less  inde- 
pendent. He  received  the  raw  material  from  a  middleman,  to 
whom  he  also  delivered  the  finished  product.  Much  of  this  work 
was  done  outside  of  the  towns,  the  artisans  thus  being  enabled  to 
devote  part  of  their  time  to  agriculture.  Defoe,  in  his  tour 
through  Great  Britain  (1724-1726),  describes  the  methods  em- 
ployed as  follows :  — 

The  land  "  was  divided  into  small  inclosures  from  two  acres  to  six  or  seven 
each,  seldom  more ;  every  three  or  four  pieces  of  land  had  an  house  belonging 
to  them,  .  .  .  hardly  an  house  standing  out  of  a  speaking  distance  from 
another.  .  .  .  We  could  see  at  every  house  a  tenter,  and  on  almost  every 


THE   EVOLUTION   OF  ECONOMIC   SOCIETY  37 

tenter  a  piece  of  cloth  or  kersie  or  shaloon.  ...  At  every  considerable 
house  was  a  manufactury.  .  .  .  Every  clothier  keeps  one  horse,  at  least, 
to  carry  his  manufactures  to  the  market,  and  every  one  generally  keeps  a 
cow  or  two  or  more  for  his  family.  By  this  means  the  small  pieces 
of  inclosed  land  about  each  house  are  occupied,  for  they  scarce  sow  corn 
enough  to  feed  their  poultry.  .  .  .  The  houses  are  full  of  lusty  fellows,  some 
at  the  dye-vat,  some  at  the  looms,  others  dressing  the  cloths ;  the  women  or 
children  carding  or  spinning,  being  all  employed,  from  the  youngest  to  the 
oldest." 

The  domestic  system  should  be  distinguished  from  the  mano- 
rial economy  of  the  agricultural  period,  for  the  production  under 
the  domestic  system  was  not  for  home  consumption  simply,  but 
for  the  market. 

Agricultural  Changes.  —  During  the  handicraft  period  there 
were  also  important  changes  in  the  agricultural  life  of  England. 
The  most  prominent  of  these  is  the  process  of  inclosing  the  com- 
mon fields  for  the  purpose  of  pasturage  during  the  Tudor  period. 
Later,  the  farmers  practiced  what  was  known  as  "convertible  hus- 
bandry"; that  is,  the  pasture  was  plowed  up  every  few  years  for 
raising  crops.  This,  again,  has  been  superseded  by  the  modern 
system  of  crop  rotation. 

The  Mercantile  System.  —  The  decay  of  town  authority  did  not 
imply  that  industry  and  commerce  were  left  to  the  free  play  of 
competition.  The  supervision  of  the  central  government  took 
the  place  of  that  of  the  towns.  The  national  system  of  regula- 
tion has  been  called  the  Mercantile  System,  which  prevailed  in 
England  in  the  sixteenth,  seventeenth,  and  most  of  the  eighteenth 
centuries.  Its  essential  idea  is  the  guidance  of  economic  affairs 
in  such  a  way  as  to  increase  the  commercial  and  military  power 
of  the  nation  as  a  whole.  The  navigation  laws  which  the  student 
has  met  with  in  his  study  of  American  history  were  a  part  of  this 
system.  An  attempt  was  made  to  create  a  "favorable"  balance 
of  trade  and  to  maintain  a  good  supply  of  the  precious 
metals.  Agriculture  was  fostered  with  the  aim  of  promoting  the 
growth  of  population.  The  mercantile  system  has  often  been  de- 
scribed as  consisting  chiefly  of  trade  restrictions,  but  it  is  the  con- 
tention of  Professor  Schmoller  that  in  its  essence  the  system  meant 
"the  replacing  of  a  local  and  territorial  economic  policy  by  that 


38  OUTLINES  OF  ECONOMICS 

of  the  national  state."     Within  the  nation  it  tended  to  make 
trade  free. 

It  was  characteristic  of  the  mercantile  system,  too,  to  interfere 
in  the  conduct  of  internal  trade.  Prices,  wages,  and  the  rules  of 
apprenticeship  were  fixed  by  public  authority.  The  quality  of 
goods  was  inspected  by  public  officials.  Patents  of  monopoly  on 
the  sale  of  certain  commodities,  such  as  gunpowder,  matches,  and 
playing  cards,  were  extensively  granted  by  royal  authority  to  fa- 
vored individuals  or  companies,  ostensibly  to  foster  new  industries. 

"At  the  Council  of  York,  Charles  was  obliged  to  declare  many  of  the 
industrial  patents  void;  but  enough  remained  to  call  forth  an  indignant 
declamation  from  Sir  J.  Colepepper  in  the  Long  Parliament:  'I  have  but 
one  Grievance  more  to  offer  unto  you ;  but  this  one  compriseth  many ;  it 
is  a  nest  of  wasps,  or  swarm  of  vermin,  which  have  overcrept  the  land, 
I  mean  the  monopoler  and  polers  of  the  people.  These  like  the  frogs  of 
Egypt,  have  got  possession  of  our  dwellings,  and  we  have  scarce  a  room  free 
from  them ;  they  sip  in  our  cup,  they  dip  in  our  dish,  they  sit  by  our  fire ; 
we  find  them  in  the  dye-vat,  wash-bowl,  and  powdery  tub ;  they  share  with 
the  butler  in  his  box,  they  have  marked  us  and  sealed  us  from  head  to  foot. 
Mr.  Speaker,  they  will  not  bate  us  a  pin ;  we  may  not  buy  our  own  cloaths 
without  their  brokage.  These  are  the  leeches  that  have  sucked  the  com- 
monwealth so  hard  that  it  is  almost  become  hectical.  And  some  of  these 
are  ashamed  of  their  right  names;  they  have  a  vizard  to  hide  the  brand 
made  by  that  good  law  in  the  last  Parliament  of  King  James;  they  shelter 
themselves  under  the  name  of  a  corporation ;  they  make  bye-laws  which 
serve  their  turns  to  squeeze  us  and  to  fill  their  purses ;  unface  these  and  they 
will  prove  as  bad  curs  as  any  in  the  pack.  These  are  not  petty  chapmen,  but 
wholesale  men.'  " 1 

A  full  account  of  this  stage  in  English  history  would  deal  with 
(i)  the  regulation  of  labor,  including  the  Statute  of  Artificers 
passed  in  the  reign  of  Elizabeth,  which  provided  that  all  able- 
bodied  men  might  be  compelled  to  serve  as  agricultural  laborers, 
and  that  all  artificers,  rural  or  urban,  should  undergo  an  appren- 
ticeship of  at  least  seven  years.  In  this  same  reign  provision  was 
made  for  the  assessment  of  wages  by  the  Justices  of  the  Peace. 
Every  year  in  each  locality  the  justices  were  to  assemble,  and, 
"  calling  to  them  such  discreet  and  grave  persons  ...  as  they 

1  Cunningham,  English  Commerce  and  Industry,  Modern  Times,  Part  I  pp. 
307-8. 


THE  EVOLUTION   OF  ECONOMIC   SOCIETY  39 

shall  think  meet,  and  conferring  together  respecting  the  plenty  or 
scarcity  of  the  time,"  they  were  to  fix  the  wages  for  every  kind 
of  manual  labor,  skilled  or  unskilled,  by  the  year,  week,  or  day, 
and  with  or  without  allowance  of  food.  (2)  The  stage  would  deal 
further  with  the  development  of  systematic  poor  relief  by  civil 
authority  ;  (3)  the  encouragement  of  shipping  and  of  (4)  the  im- 
migration of  foreign  artisans  to  introduce  new  industries;  (5)  the 
regulation  of  the  corn  trade;  (6)  the  establishing  of  plantations 
in  the  colonies;  (7)  the  regulation  of  the  coinage;  (8)  the  develop- 
ment of  banking,  insurance,  and  foreign  commerce,  and  the  decay 
of  the  old  notions  regarding  the  sinfulness  of  interest  taking. 

V.  THE  INDUSTRIAL  STAGE 

In  the  latter  part  of  the  eighteenth  century,  the  slow-going 
methods  of  the  handicraft  stage  were  radically  changed  by  the 
Industrial  Revolution.  The  fundamental  feature  of  this  change 
is  the  introduction  of  power  manufacture.  The  industrial  revo- 
lution and  the  chief  features  of  the  Industrial  stage  will  be  dis- 
cussed in  the  following  chapter. 

Before  proceeding  to  the  consideration  of  the  last  stage,  it  may 
be  well  to  notice  some  of  the  other  views  which  have  been  expressed 
concerning  the  periods  of  economic  development.  The  German 
economist,  Hildebrand,  has  taken  as  his  principle  of  classification 
the  method  of  exchanging  goods,  and  from  this  standpoint  he  gets 
the  following  three  stages :  (i)  barter,  (2)  money,  and  (3)  credit. 
All  three  methods  of  exchanging,  to  be  sure,  are  in  use  at  the  pres- 
ent time,  but  the  extensive  use  of  credit  is  the  new  and  character- 
istic thing  about  present-day  exchange.  It  has  been  objected  that 
the  period  before  the  use  of  money  became  prominent  is  charac- 
terized not  so  much  by  the  barter  of  goods  as  by  the  fact  that 
exchange  itself  is  unimportant. 

Another  writer  (Biicher)  has  divided  economic  history  accord- 
ing to  the  length  of  time  which  elapses  between  the  production 
and  the  consumption  of  commodities,  as  follows:  — 

1.  The  independent  domestic  economy. 

2.  The  town  economy. 

3.  The  national  economy. 


OUTLINES   OF   ECONOMICS 


In  the  first  stage  the  interval  between  the  production  and  con- 
sumption is  small.  Things  are  produced  where  they  are  consumed, 
as  in  the  village  communities  of  the  early  middle  ages.  In  the  town 
economy  the  interval  is  somewhat  greater.  The  artisans  in  the 
town  produce  for  the  consumption  of  other  persons,  for  the  most 
part  in  the  immediate  neighborhood,  so  that  the  producer  meets 
the  consumer  without  intermediaries.  In  the  third  stage,  produc- 
tion is  for  a  national  market,  so  that  goods  may  pass  through  many 
hands  before  reaching  the  consumer.  Possibly,  according  to  this 
view,  a  fourth  stage  might  be  added,  —  that  of  a  world  economy. 

Again,  we  might  pay  attention  chiefly  to  the  condition  of  labor. 
Beginning  with  a  condition  where  there  is  no  distinct  laboring 
class,  we  pass  through  slavery  and  serfdom  to  free  labor,  regu- 
lated at  first  by  law  and  custom,  and  then  the  free  laborer  arranges 

THE  ECONOMIC   STAGES 


STANDPOINT 

FROM 
BOCHER'S 

FROM 
HILDEBRAND'S 

FROM 
THE  LABOR 

ILLUSTRATIONS 
FROM  ENGLISH 

OF  PRODUC- 

STANDPOINT 

STANDPOINT 

STANDPOINT 

HISTORY 

TION 

I. 

Direct  Ap- 

Prehistoric 

propriation 

2. 

Domestic 

Barter 

Laboring 

Pastoral 

Economy 

class  not  dif- 

Before Christ 

Economy 

ferentiated 

3- 

Slavery  and 

nth-i4th 

Agricultural 

Serfdom 

Centuries 

4- 
Handicraft 

Town 
Economy 

Money 
Economy 

Free  Labor 
governed 
by  Custom 

I3th-i8th 
Centuries 

5- 
Industrial 

National 
Economy 

Credit 
Economy 

Individual 
Contract 
Group 

i8th  Century 
to  the  Pres- 
ent Time 

Contract 

THE  EVOLUTION    OF  ECONOMIC   SOCIETY  41 

the  conditions  of  work  by  individual  contract,  and  finally  to  an 
increasing  extent  by  group  contract  or  collective  bargaining. 

These  various  classifications  are  not  contradictory;  on  the  con- 
trary, they  supplement  each  other.  Still  other  divisions  are  pos- 
sible. In  the  preceding  table  these  various  points  of  view  are 
correlated  and  applied  to  the  history  of  England. 

QUESTIONS  AND  EXERCISES 

1.  Write  a  description  of  the  economic  life  of  a  tribe  in  one  of  the  first  two 
stages. 

2.  What  are  the  theories  concerning  the  origin  of  cannibalism  ? 

3.  What  is  the  extent  of  slavery  in  Africa  at  the  present  time  ? 

4.  Sketch  the  development  of  the  woolen  industry  in  England  to  1760. 

5.  Give  an  account  of  the  origin  of  the  Bank  of  England. 

6.  Summarize  the  history  of  poor  relief  in  England. 

REFERENCES 

ANDREWS,  C.  M.     The  Old  English  Manor. 

ASHLEY,  W.  J.     English  Economic  History,  Vol.  I. 

BUCHER,  KARL.     Industrial  Evolution  (trans,  by  S.  M.  Wickett). 

CHEYNEY,  E.  P.     Industrial  and  Social  History  of  England,  Chaps.  I  to  VII. 

CUNNINGHAM,    W.     Growth   of  English   Industry  and   Commerce,   Vol.   I 

(Middle  Ages)  and  Vol.  II  (Mercantile  System). 
ELY,  R.  T.     Evolution  of  Industrial  Society,  Part  I,  Chap.  III. 
LUBBOCK,  SIR  JOHN.     Prehistoric  Times,  Chap.  I. 
MORGAN,  L.  H.     Ancient  Society,  Chap.  I. 
PRICE,  L.  L.     A  Short  History  of  English  Commerce  and  Industry,  Chaps.  I 

to  VIII. 

PRICE,  W.  H.     English  Patents  of  Monopoly. 
RATZEL,  F.     History  of  Mankind  (trans,  by  A.  J.  Butler),  3  vols. 
SCHMOLLER,  G.     The  Mercantile  System  (Economic  Classics,  edited  by  W.  J. 

Ashley). 

SEEBOHM,  F.     The  English  Village  Community. 
STANLEY,  H.  M.     In  Darkest  Africa,  Vol.  I,  Chap.  XXIII. 
WALLACE,  A.  R.     Russia  (edition  of  1905),  Chap.  VIII. 
WARNER,  T.     Landmarks  in  English  Industrial  History,  Chaps.  I  to  XIV. 


CHAPTER   IV 
THE  EVOLUTION  OF  ECONOMIC   SOCIETY   (Continued) 

The  Industrial  Revolution.  —  The  passage  from  the  handicraft 
to  the  industrial  stage  in  England  is  generally  known  as  the  In- 
dustrial Revolution.  It  has  been  objected  that  this  term  is  mis- 
leading because  the  introduction  of  the  modern  factory  system 
required  many  years  and  was  but  the  working  out  of  conditions 
that  had  been  long  maturing.  It  is  true  that  the  growth  in  the 
division  of  labor,  the  expansion  of  commerce,  and  the  technical 
progress  of  former  ages  were  necessary  preliminaries  to  the  in- 
dustrial revolution,  but  there  is  little  danger  of  overemphasizing 
the  importance  or  the  rapidity  of  the  change.  The  period  from 
1770  to  1840,  the  span  of  a  single  life,  is,  after  all,  a  short  period 
from  the  standpoint  of  the  historian.  Yet  the  changes  of  this 
period  swept  away  the  inefficient  methods  that  had  been  used  for 
centuries,  and  caused  profound  modifications  in  social  structure. 
To  understand  the  nature  of  this  movement,  we  must  review  the 
condition  of  things  before  it  began. 

England  in  1760.  —  England  was  at  this  time  largely  self-suffic- 
ing in  its  economic  life,  producing  for  itself  its  food  and  other 
articles  of  ordinary  consumption,  although  compared  with  medi- 
aeval days  there  had  been  a  marked  expansion  of  international 
and  colonial  trade.  Woolen  goods  were  the  most  important  ex- 
port. The  imports  consisted  largely  of  wines,  spirits,  rice,  sugar, 
coffee,  oil,  and  furs,  and  some  wool,  hemp,  silk,  and  linen  yarn. 
Within  the  nation,  too,  there  was  not  such  a  degree  of  specializa- 
tion of  industry  in  particular  localities  as  is  found  at  the  present 
day,  although  the  beginning  of  such  localization  had  clearly  been 
made  in  the  textile  and  iron  industries.  On  the  whole,  however, 
the  commerce  between  the  different  sections  of  the  country  was 

42 


THE   EVOLUTION   OF   ECONOMIC   SOCIETY  43 

slight.  The  means  of  transportation  were  exceedingly  poor,  not- 
withstanding the  growth  of  turnpike  roads.  The  roads  were  de- 
scribed by  a  traveler  as  "most  execrably  vile."  Such  was  their 
condition  that  pack  horses  were  still  a  common  means  of  getting 
goods  to  market.  Rivers  were  important  highways,  canal  build- 
ing having  barely  begun. 

The  system  of  hand  manufacture  was  still  in  general  operation. 
Although  the  workmen  under  the  domestic  system  were  no  longer 
owners  of  the  material  upon  which  they  worked,  yet  the  tools 
they  used  were  their  property.  The  beginnings  of  certain  fea- 
tures of  the  factory  system,  however,  are  to  be  seen  long  before 
the  use  of  power  machinery,  for  in  some  cases  workmen  were  em- 
ployed in  large  numbers  in  buildings  owned  by  the  employer,  who 
also  furnished  the  mechanical  equipment.  But  to  a  large  extent 
manufacturing  was  combined  with  agriculture,  not  only  in  the 
textile  trades,  but  in  other  branches  also.  "At  West  Bromwich,  a 
chief  center  of  the  metal  trade,  agriculture  was  still  carried  on 
as  a  subsidiary  pursuit  by  the  metal  workers." 

The  mediaeval  system  of  common  field  tillage  was  extensively 
used,  a  large  part  of  the  land  being  still  uninclosed.  The  culti- 
vation was  exceedingly  poor,  but  important  experiments  tending 
toward  a  "new  agriculture"  were  being  made  in  the  second  quar- 
ter of  the  eighteenth  century  by  JethroTull  and  "Turnip"  Town- 
shend.  Of  the  whole  number  of  farms,  approximately  one  half 
"were  owned  and  occupied  by  the  various  classes  of  freeholders 
and  copyholders;  that  is,  by  land-owning  farmers." 

The  mediaeval  notion  of  government  was  still  nominally  in  force. 
Detailed  and  special  legislation  was  supposed  to  be  the  means  of 
securing  a  well-ordered  trade,  as  explained  in  the  preceding  chap- 
ter. But  a  tremendous  revolt  had  begun  against  this  whole  sys- 
tem of  government.  This  revolt  had  its  religious  and  political  as 
well  as  its  economic  aspect.  The  same  year  that  Thomas  Jeffer- 
son wrote  the  Declaration  of  Independence,  asserting  that  all 
men  are  by  nature  equal,  Adam  Smith  published  the  Wealth 
of  Nations,  the  most  influential  book  ever  written  on  economics. 

"Every  individual,"  said  Smith,  "is  continually  exerting  himself  to  find 
out  the  most  advantageous  employment  for  whatever  capital  he  can  command. 


44  OUTLINES   OF  ECONOMICS 

It  is  his  own  advantage,  indeed,  and  not  that  of  the  society,  which  he  has  in 
view.  But  the  study  of  his  own  advantage,  naturally,  or  rather  necessarily, 
leads  him  to  prefer  that  employment  which  is  most  advantageous  to  society. 
.  .  .  What  is  the  species  of  domestic  industry  which  his  capital  can  employ, 
and  of  which  the  produce  is  likely  to  be  of  the  greatest  value,  every  in- 
dividual, it  is  evident,  can,  in  his  local  situation,  judge  much  better  than  any 
statesman  or  lawgiver  can  for  him."  l 

The  Mechanical  Inventions.  —  During  the  last  half  of  the  eight- 
eenth century  the  progress  of  invention  was  exceptionally  rapid. 
Kay's  flying  shuttle  (1738)  had  facilitated  the  weaving  process  to 
such  an  extent  that  it  became  difficult  to  secure  enough  yarn  from 
the  spinners.  Hand  spinning  was  improved  by  Hargreave's 
"jenny"  about  1767;  Arkwright,  in  1771,  made  a  practical  success 
of  roller  spinning  (a  method  patented  long  before),  using  horse 
power,  and  later,  water  power.  Crompton  combined  these  two 
processes  in  1779.  After  1785  steam  power  was  applied  to  cotton 
spinning,  and  then  it  was  the  weaving  process  that  was  felt  to  be 
too  slow.  Cartwright  began  his  experiments  in  1784,  but  the 
power  loom  did  not  come  into  general  use  until  early  in  the  nine- 
teenth century. 

The  improvement  in  the  steam  engine  also  made  possible  great 
advances  in  the  iron  industry,  of  fundamental  importance  in  an 
age  of  machinery.  The  production  of  English  iron  was  over  sev- 
enty-five times  as  great  in  1840  as  it  had  been  in  1740. 

The  need  for  better  transportation  was  met  by  improved  roads, 
by  the  building  of  canals  (especially  1790  to  1805),  and  by  the 
development  of  steam  locomotion.  The  germ  of  the  modern  rail- 
way is  seen  in  the  tramways  used  in  the  coal  mines.  Cast  iron 
rails  were  used  as  early  as  1738.  The  first  tramway  to  be  used 
for  public  purposes  was  chartered  in  1801,  the  cars  to  be  drawn 
by  horse  power.  Trevithick  made  a  locomotive  in  1803  that  was 
of  practical  use.  In  1814  Stephenson  constructed  a  locomotive 
that  could  draw  a  load  of  thirty  tons  at  the  rate  of  three  miles  an 
hour.  The  Stockton  and  Darlington  road  was  opened  in  1825 
with  a  Stephenson  locomotive  that  made  fifteen  miles  an  hour, 
but  two  years  later  the  directors  of  the  road  considered  the  advisa- 
bility of  abandoning  the  use  of  locomotives.  In  1829  the  direc- 

>A.  Smith,  Wealth  of  Nations,  Book  IV,  Chap.  II. 


THE   EVOLUTION   OF   ECONOMIC   SOCIETY 


45 


tors  of  the  Liverpool  and  Manchester  Railroad  arranged  a  prize 
contest  to  determine  the  practicability  of  steam  locomotion.  The 
success  of  Stephenson's  "Rocket"  in  meeting  the  requirements  of 
the  contest  demonstrated  that  the  new  method  of  locomotion  had 
come  to  stay. 

"A  general  survey  of  the  growth  of  new  industrial  methods  in  the  textile 
and  iron  industries  marks  out  three  periods  of  abnormal  activity  in  the  evolu- 
tion of  modern  industry.  The  first  is  1780-1795,  when  the  fruits  of  early 
inventions  were  ripened  by  the  effective  application  of  steam  to  the  machine 
industries.  The  second  is  1830  to  1845,  when  industry,  reviving  after  the 
European  strife,  utilized  more  widely  the  new  inventions,  and  expanded  under 
the  stimulus  of  steam  locomotion.  The  third  is  1856-1866  (circa),  when  the 
construction  of  machinery  by  machinery  became  the  settled  rule  of  industry."  * 

It  is  impossible  here  to  review  all  the  lines  of  progress  in  inven- 
tion and  discovery.  This  progress  is  not  confined  to  mechanical 
matters,  and  taken  as  a  whole,  undoubtedly  has  been  much  more 
rapid  in  the  nineteenth  than  in  any  preceding  century. 

Mr.  Alfred  Russel  Wallace  says  that  "  to  get  any  adequate  comparison  with 
the  nineteenth  century  we  must  take,  not  any  preceding  century  or  group  of 
centuries,  but  rather  the  whole  preceding  epoch  of  human  history."  A 
basis  for  his  statement  is  given  by  the  following  comparative  lists  of  great 
inventions  and  discoveries.  One  hesitates  to  make  such  a  comparison,  but 
it  possesses  some  interest :  — 

OF   THE   NINETEENTH   CENTURY  OF   ALL   PRECEDING   AGES 

1.  Railways  i.  The  Mariner's  Compass 

2.  Steamships  2.  The  Steam  Engine 

3.  Electric  Telegraphs  3.  The  Telescope 

4.  The  Telephone  4.  The  Barometer  and  Thermometer 

5.  Lucifer  Matches  5.  Printing 

6.  Gas  Illumination  6.  Arabic  Numerals 

7.  Electric  Lighting  7.  Alphabetical  Writing 

8.  Photography  8.  Modern  Chemistry  Founded 

9.  The  Phonograph  9.  Electric  Science  Founded 

10.  Rontgen  Rays  10.  Gravitation  Established 

11.  Spectrum  Analysis  n.  Kepler's  Laws 

12.  Anaesthetics  12.  The  Differential  Calculus 

13.  Antiseptic  Surgery  13.  The   Circulation  of  the   Blood 

14.  Conservation  of  Energy  14.  Light    proved    to    have     Finite 

Velocity 

1  Hobson,  Evolution  of  Modern  Capitalism,  new  edition  of  1907,  p.  89. 


46  OUTLINES   OF  ECONOMICS 

OF  THE  NINETEENTH  CENTURY  OF   ALL   PRECEDING   AGES 

15.  Molecular  Theory  of  Gases          15.   The  Development  of  Geometry 

1 6.  Velocity     of    Light    directly 

measured,  and  Earth's  Ro- 
tation experimentally  shown 

17.  The  Uses  of  Dust 

18.  Chemistry,   Definite   Propor- 

tions 

19.  Meteors  and  the   Meteoritic 

Theory 

20.  The  Glacial  Epoch 

21.  The  Antiquity  of  Man 

22.  Organic  Evolution  established 

23.  Cell  Theory  and  Embryology 

24.  Germ  Theory  of  Disease,  and 

the  Function  of  the  Leuco- 
cytes.1 

Agricultural  Changes.  —  During  the  Industrial  Revolution  there 
were  also  important  changes  in  agriculture.  Bakewell,  in  the  sec- 
ond half  of  the  eighteenth  century,  improved  the  breeds  of  sheep 
and  cattle.  The  inclosing  of  the  common  fields  proceeded  with 
great  rapidity,  not,  as  in  the  sixteenth  century,  for  the  purpose  of 
sheep  raising,  but  to  permit  of  more  efficient  tillage  of  the  soil. 
Between  1760  and  1850  over  seven  million  acres  were  inclosed  in 
England.  The  small  land-owning  farmer  was  crowded  out,  partly 
because  more  investment  per  acre  was  needed  with  the  new  agri- 
culture, partly  because  "gentlemen  farmers"  (men  who  had  made 
money  in  other  pursuits  and  took  up  agriculture  because  it  was 
fashionable)  bought  them  out,  and  because  the  price  of  land  was 
greatly  increased  by  the  desire  of  wealthy  men  to  build  up  family 
estates.  To-day  practically  all  English  farmers  are  tenants.  The 
small  farmer,  who  under  the  domestic  system  was  also  frequently 
a  handicraftsman,  was  thus  crushed  between  the  new  agriculture 
and  the  new  industry. 

"Hitherto  the  rude  implements  required  for  the  cultivation  of  the  soil, 
or  the  household  utensils  needed  for  the  comfort  of  daily  life,  had  been  made 
at  home.  The  farmer,  his  sons,  and  his  servants  in  the  long  winter  evenings 
carved  the  wooden  spoons,  the  platters,  and  the  beechen  bowls,  plaited  wicker 

1  Wallace,  The  Wonderful  Century,  pp.  154-155. 


THE   EVOLUTION   OF  ECONOMIC  SOCIETY  47 

baskets,  fitted  handles  to  the  tools,  cut  willow  teeth  for  rakes  and  harrows 
and  hardened  them  in  the  fire,  fashioned  ox  yokes  and  forks,  twisted  willows 
into  the  traces  of  other  harness  gear.  Traveling"  carpenters  visited  farm- 
houses at  rare  intervals  to  perform  those  parts  of  work  which  needed  their 
professional  skill.  The  women  plaited  the  straw  for  the  neck  collars,  stitched 
and  stuffed  sheepskin  bags  for  the  cart  saddle,  wove  the  straw  and  hempen 
stirrups  and  halters,  peeled  the  rushes  for  and  made  the  candles.  The 
spinning  wheel,  the  distaff,  and  the  needle  were  never  idle;  coarse  hand-made 
cloth  and  linen  supplied  all  wants;  every  farmhouse  had  its  brass  brewery 
kettle.  .  .  .  All  the  domestic  industries  by  which  cultivators  of  the  soil 
increased  their  incomes,  or  escaped  the  necessity  of  .selling  their  produce, 
were  now  supplanted  by  manufactures."  * 

Effects  of  the  Industrial  Revolution.  —  As  has  already  been  indi- 
cated, the  Industrial  Revolution  introduces  one  of  the  great  stages 
in  the  development  of  man's  power  over  nature.  But  along  with 
the  new  opportunities  came  also  new  dangers  and  perplexing 
problems. 

(i)  The  Factory  System. — The  use  of  expensive  machinery 
and  steam  power  made  it  impossible  for  men  to  carry  on  their 
work  in  their  own  homes.  The  factory  supplants  the  home  as 
the  typical  unit  of  production.  Instead  of  working  by  themselves 
or  with  a  few  assistants,  men  now  to  a  much  greater  extent  than 
before  must  congregate  in  cities,  and  submit  to  a  new  discipline  in 
large  groups  organized  for  purposes  of  production.  This  brought 
with  it  a  new  division  of  society  into  classes.  The  machine  and 
the  workshop,  as  well  as  the  raw  material  and  the  product,  are  at 
no  stage  in  the  productive  process  owned  by  the  men  who  do  the 
manual  work.  The  masses  become  wage  earners.  Now,  in  some 
industries  not  one  in  a  hundred  can  by  exceptional  ability  become 
an  independent  employer,  and  the  workman  knows  that  he  is  a 
workman  for  life.  So  we  have  now  two  industrial  classes,  laborers 
and  capitalists,  with  a  great  gulf  between  them  which  compara- 
tively few  men  can  cross,  and  with  interests  which  often  seem 
irreconcilable.  What  the  ultimate  effects  of  the  new  system  of 
production  will  be  cannot  be  stated,  but  it  has  been  suggested 
that  these  changes  in  external  relations  are  affecting  also  men's 

1  Prothero,  quoted  by  Cunningham,  Growth  of  English  Industry  and  Com- 
merce, Modern  Times,  Part  II,  p.  722. 


48  OUTLINES   OF  ECONOMICS 

habits  of  thought.  Can  we  expect  the  institution  of  private  prop- 
erty to  seem  as  natural  and  sacred  to  those  who  have  nothing  to 
do  with  the  buying  and  selling  of  products  as  to  those  who  engage 
much  in  pecuniary  transactions?  It  has  been  suggested  that  the 
feeling  that  we  have  a  right  to  the  product  of  our  own  labor  is 
merely  a  survival  of  the  era  of  small-scale  hand  manufacture. 

(2)  The  Expansion  of  Markets  and  Industrial  Specialization.  — 
Along  with  the  new  methods  of  production  there  has  been  a  change 
from  restricted  local  markets  to  national  and  even  world  markets. 
Improved  methods  of  transportation  make  it  possible  for  different 
branches  of  production  to  be  localized  in  regions  where  there  are 
special  facilities  for  raw  material  or  power.  This  implies  greater 
economic  interdependence  and  greater  liability  to  trade  fluctua- 
tions and  disturbances.  One  great  advantage  of  the  old  slow- 
going  system  of  manufacture  and  trade  was  its  regularity.  As  the 
area  of  the  market  increases,  manufacturers  find  it  more  difficult 
to  decide  what  and  how  much  to  produce.  Trade  fluctuations 
have  increased  in  severity  with  the  growth  of  large-scale  produc- 
tion. This  is  due  not  merely  to  the  changing  and  enlarging  de- 
mand which  cannot  be  calculated,  but  also  to  the  fact  that  manu- 
facture itself  is  constantly  being  disturbed  by  improvements  which 
cannot  be  foreseen.  It  is  possible  that  a  still  larger  scale  of  manu- 
facture hereafter  will  bring  steadiness  in  industry,  but  whatever 
the  cause  of  these  fluctuations,  the  effect  upon  the  wage  earner  is 
demoralizing.  If  he  were  wise  enough  to  save  his  earnings  dur- 
ing good  times,  and  so  have  something  for  hard  times,  he  would 
not  suffer  so  much.  But  very  few  people  who  live  in  abundance 
can  do  this;  how  much  less  those  whose  condition  even  in  good 
times  is  one  of  meager  comfort ! 

Evils  of  the  Transitional  Period.  — The  condition  of  the  English 
working  classes  in  the  latter  part  of  the  eighteenth  and  early  nine- 
teenth centuries  was  undoubtedly  worse  than  in  any  other  period 
in  the  history  of  the  country.  It  is  difficult  to  say  to  what  extent 
this  was  due  to  the  introduction  of  the  factory  system.  In  addi- 
tion to  the  new  methods  of  manufacture  there  were  wars,  peculiar 
facts  about  land  ownership,  duties,  and  taxes.  There  is  some 
evidence  that  the  condition  of  child  workers  under  the  domestic 


THE  EVOLUTION   OF  ECONOMIC  SOCIETY  49 

system  was  often  worse  than  in  the  factories,  their  parents  prov- 
ing the  hardest  taskmasters. 

"The  evils  and  horrors  of  the  industrial  revolution  are  often  vaguely 
ascribed  to  the  '  transition  stage '  brought  about  by  the  development  of  ma- 
chinery and  the  consequent '  upheaval.'  But  the  more  we  look  into  the  matter, 
the  more  convinced  we  become  that  the  factory  system  and  machinery  merely 
took  what  they  found,  and  that  the  lines  on  which  the  industrial  revolution 
actually  worked  itself  out  cannot  be  explained  by  the  progress  of  material 
civilization  alone ;  rather,  the  disregard  of  child-life,  the  greed  of  child-labour, 
and  the  maladministration  of  the  poor  law  had,  during  the  eighteenth  century, 
and  probably  much  farther  back  still,  been  preparing  the  human  material 
that  was  to  be  so  mercilessly  exploited."  * 

But  whatever  the  causes,  the  facts  that  have  been  revealed  re- 
garding the  conditions  in  English  mines  and  factories  of  this  period 
are  amazing.  The  picture  includes  cruelty  to  apprenticed  chil- 
dren, excessive  hours,  and  unhealthful  conditions  of  work.  The 
evils  were  worst  in  the  smaller  factories,  the  owners  of  which  were 
hard  pressed  by  relentless  competition.  Outside  of  the  factories, 
also,  those  who  attempted  to  continue  to  work  in  their  homes  in 
the  old  way  suffered  from  irregular  employment  and  low  earn- 
ings. The  distress  of  the  hand-loom  weavers  affords  an  illustra- 
tion. 

Competition  and  Laissez-faire.  —  We  have  seen  that  Adam 
Smith  advocated  liberty.  He  asserted  that  every  man,  if  allowed 
to  do  as  he  pleased,  would  sooner  or  later  do  that  for  which  he 
/as  best  fitted,  and  would  consequently  work  where  he  could  get 
the  most  wages.  Every  man  would  buy  what  suited  him  best, 
and,  after  some  experiment,  manufacturers  would  make  what  was 
called  for.  If  one  line  of  work  was  more  profitable  than  another, 
more  men  would  go  into  it  and  by  their  competition  would  bring 
prices  down.  If  men  cheated  their  customers,  the  men  would  go 
somewhere  else,  and  cheating  would  not  pay.  Everywhere  men 
would  look  out  for  their  own  interests  and  would  make  the  bar- 
gain that  was  most  advantageous  to  themselves.  This  system  of 
balanced  self-interests  resulting  from  competition  was  the  best 
regulator  possible,  infinitely  better,  he  claimed,  than  the  old-time 
laws,  which  only  incumbered  the  development  of  industry.  If 

1  Hutchins  and  Harrison,  A  History  of  Factory  Legislation,  p.  13. 
E 


50  OUTLINES   OF  ECONOMICS 

the  policy  of  industrial  freedom  were  adopted,  he  prophesied  a 
great  increase  in  the  national  production  of  wealth. 

This  view  gained  in  favor  during  the  Industrial  Revolution.  Not 
that  a  wholesale  repeal  of  the  old  laws  occurred,  —  such  things 
never  happen  in  England,  and  are  difficult  anywhere,  —  but  there 
is  a  quiet  and  effective  way  of  changing  laws  by  changing  men's 
ideas  regarding  them  and  leaving  them  unenforced.  A  law  that 
has  been  long  observed  has  often  to  be  long  dead  before  people 
gain  the  courage  to  repeal  it.  So  the  law  requiring  seven  years' 
apprenticeship  before  one  could  enter  certain  trades  quietly  died 
during  the  eighteenth  century,  and  when,  finally,  in  the  labor 
troubles  early  in  the  nineteenth  century,  some  workmen  in  desper- 
ation discovered  the  old  law  and  prosecuted  employers  for  violat- 
ing it,  the  law  was  first  suspended  and  then  repealed,  as  being 
plainly  ill  adapted  to  the  new  condition  of  industry.  So,  little  by 
little,  the  old  laws  were  repealed  or  forgotten,  and  men  were  left 
free  to  bargain  and  manufacture  as  they  pleased. 

This  policy  of  laissez-faire,  or  letting  things  drift,  was  very  gen- 
erally accepted  by  the  economic  writers  who  followed  Adam  Smith, 
and  was  clearly  reflected  in  the  parliamentary  debates.  The  uni- 
versal free  play  of  competition  came  to  be  the  prevailing  ideal  in 
this  first  phase  of  the  industrial  stage.  It  was  in  keeping  with 
this  spirit  that  England  became  a  free-trade  nation  in  this  period, 
the  last  step  being  taken  when  the  "corn  laws"  were  repealed  in 
1846,  the  act  going  into  effect  in  1849. 

The  Reaction  against  the  Passive  Policy.  —  It  may  be  said  that 
by  1850  the  abandonment  of  mercantilistic  ideas  was  complete  in 
England,  but  long  before  this  date  a  new  system  of  legislation  was 
enacted  for  the  purpose  of  controlling  industry.  The  government 
could  not  ignore  the  actual  condition  that  resulted  from  competi- 
tion and  the  introduction  of  machinery.  We  have  now  to  con- 
sider some  of  the  main  lines  of  development  of  industrial  regula- 
tion. 

(i)  The  Quality  of  Goods.  —  In  repealing  the  laws  for  the  in- 
spection of  wares  it  was  urged  that  cheating  would  not  pay  and 
would  cure  itself.  Indeed,  it  was  said  that  the  very  inspection  of 
wares  by  the  government  was  the  cause  of  fraud;  for,  the  govern- 


THE   EVOLUTION   OF  ECONOMIC   SOCIETY  51 

ment  brand  being  often  put  on  carelessly,  men  bought  poor  goods, 
because  of  the  brand,  which  they  would  have  rejected  if  they  had 
examined  them.  The  abolition  of  the  laws  would  result  in  each  ex- 
amining goods  for  himself,  it  was  asserted.  It  is  hardly  necessary 
to  say  that  these  hopes  were  not  realized.  Men  might  be  trusted 
to  attend  their  own  interests  if  they  knew  enough  to  do  so,  but 
they  do  not.  Who  can  tell  the  quality  of  baking  powder,  or  ground 
spices,  or  patent  medicines,  or  many  other  things  that  are  misrep- 
resented when  offered  for  sale?  For  these  the  ordinary  buyer's 
knowledge  is  worthless;  an  expert  must  be  employed.  Such  has 
been  the  experience  of  the  English  people  and  also,  more  recently, 
of  the  people  of  the  United  States,  and  the  law  now  provides  for 
the  inspection  by  government  experts  of  many  articles  of  food. 
The  theory  that  men  will  ruin  their  business  prospects  if  they  cheat, 
and  so  will  be  deterred  from  cheating,  has  been  utterly  exploded 
by  this  great  English  experiment.  The  reputation  for  honesty  is 
undoubtedly  a  source  of  strength  to  many  business  houses;  but 
many  a  man  has  perpetrated  an  audacious  fraud  upon  a  country 
for  a  few  years  and  retired  with  a  fortune  when  his  cheating  began 
to  be  known.  The  inspection  of  goods  by  the  State  is  a  principle 
now  fully  recognized,  the  only  question  being  how  far  it  should 
be  applied. 

(2)  The  Protection  of  Labor.  —  As  a  result  of  a  series  of  epi- 
demics of  infectious  fevers,  public  attention  was  called  to  the  con- 
dition of  the  apprenticed  children  in  cotton  factories.  In  1 796  the 
Manchester  Board  of  Health  reported  upon  the  unhealthful  con- 
ditions under  which  the  children  worked,  pointing  out  that  "the 
untimely  labour  of  the  night,  and  the  protracted  labour  of  the 
day,  with  respect  to  children,  not  only  tends  to  diminish  future 
expectations  as  to  the  general  sum  of  life  and  industry,  by  impair- 
ing the  strength  and  destroying  the  vital  stamina  of  the  rising  gen- 
eration, but  it  too  often  gives  encouragement  to  idleness,  extrava- 
gance and  profligacy  in  the  parents,  who,  contrary  to  the  order 
of  nature,  subsist  by  the  oppression  of  their  offspring."  In  1802 
the  first  factory  act  was  passed  to  protect  the  health  and  morals  of 
pauper  children  in  cotton  factories.  The  apprentices  were  not  to 
vrork  more  than  twelve  hours  by  day,  and  after  1804  not  at  all  by 


52  OUTLINES   OF  ECONOMICS 

night,  but  the  law  was  not  effectively  administered.  After  much 
agitation,  in  which  Robert  Owen  took  a  prominent  part,  a  second 
step  was  taken  in  1819.  The  act  prohibited  children  under  nine 
years  from  working  in  cotton  mills,  and  no  person  under  sixteen 
was  to  be  employed  more  than  twelve  hours  per  day.  As  with  the 
act  of  1802,  the  enforcement  of  the  law  was  left  to  the  justices  of 
the  peace.  In  1833  regulations  as  to  conditions  of  work  for  chil- 
dren and  young  persons  were  made  for  all  textile  factories,  and 
special  inspectors  were  provided  to  enforce  the  law.  In  the  fol- 
lowing years  the  controversy  concerning  labor  legislation  was  vio- 
lent and  bitter.  After  a  report  by  a  committee  revealing  shameful 
conditions  in  the  mines,  an  act  was  passed  in  1842  prohibiting  the 
employment  of  women  and  children  underground.  In  1844  wo- 
men were  included  in  the  protective  factory  legislation  and  the 
half-time  system  for  children  was  enacted.  The  Ten  Hours'  Act 
of  1847  limited  the  working  day  to  ten  hours.  Subsequently,  pro- 
tective legislation  was  made  to  cover  industrial  establishments  gen- 
erally. These  various  laws  were  consolidated  in  1878,  and  again 
in  1901.  Laws  now  in  force  provide  for  (i)  the  fencing  in  of 
dangerous  machinery;  (2)  sanitation  in  factories;  (3)  a  minimum 
age  and  schooling  for  children  at  work;  (4)  limitation  of  the  hours 
of  work  for  women  and  children.  There  is  no  direct  regulation 
of  the  hours  of  adult  male  workers,  nor  of  the  wages  of  any 
class  of  workers. 

Another  important  line  of  legislation  that  has  been  made  neces- 
sary by  the  extensive  use  of  machinery  deals  with  the  liability  of 
employers  in  cases  of  accidents  to  their  workmen.  Under  the 
common  law  a  workman  was  entitled  to  receive  damages  when 
injured  as  a  result  of  the  negligence  of  his  employers,  but  he  was 
supposed  to  assume  the  ordinary  risks  of  the  business.  When 
the  injury  was  caused  by  the  workman's  own  negligence  or  by 
the  negligence  of  a  fellow- workman,  the  employer  was  not  respon- 
sible. The  Employers'  Liability  Act  of  1880  gave  the  workman  a 
right  to  compensation  also  in  certain  cases  where  the  injury  was 
caused  by  the  negligence  of  other  employees,  but  in  1897,  by  the 
Workmen's  Compensation  Act,  a  radical  departure  was  made  from 
previous  legislation.  The  employer  is  now  liable  to  pay  damages 


THE  EVOLUTION   OF  ECONOMIC   SOCIETY  53 

even  when  there  has  been  no  negligence  on  his  own  part,  and  even 
when  the  accident  has  been  due  to  the  neglect  of  the  injured  work- 
man himself,  except  only  in  cases  of  "serious  and  willful  miscon- 
duct." This  principle  now  applies  also  to  agriculture,  shipping, 
and  mercantile  and  domestic  employments,  and  certain  trade  dis- 
eases have  been  made  to  count  as  accidents. 

(3)  Labor  Organizations.  — Modifications  in  the  working  of 
free  competition  have  also  been  effected  by  the  voluntary  organi- 
zation of  the  worker,  not  only  by  their  influence  upon  legislation, 
but  also  by  direct  dealings  with  employers.  We  have  noticed  the 
gilds,  which  played  a  large  part  in  the  history  of  the  middle  ages. 
These,  however,  were  not  like  modern  trades  unions.  They  were 
unions  of  men  who  worked,  but  not  exclusively  of  wage  earners, 
nor  in  the  interests  of  wage  earners  even  chiefly.  They  were 
formed  of  masters.  But  combinations  of  the  wage-earning  classes 
are  found  long  before  the  Industrial  Revolution.  They  do  not 
become  prominent,  however,  until  the  nineteenth  century.  Laws 
prohibiting  the  combination  of  laborers  had  been  passed  at  inter- 
vals since  the  middle  ages,  and  in  1800  Parliament,  finding  that 
unions  were  increasing,  passed  a  most  comprehensive  law  to  sup- 
press them,  declaring  illegal  "all  agreements  between  journeymen 
and  workmen  for  obtaining  advances  of  wages,  reductions  of  hours 
of  labor,  or  any  other  changes  in  the  conditions  of  work."  Under 
this  law  many  workmen  were  prosecuted  and  severely  punished, 
but  in  vain.  In  1824  Parliament  confessed  the  law  a  mistake, 
and  repealed  it  along  with  previous  laws  relating  to  combinations 
of  workmen.  Trades  unions  thus  tolerated  grew  at  an  astonish- 
ing rate,  but  they  were  still  subject  to  legal  persecution.  Judicial 
decisions,  especially,  were  adverse  to  them,  as  the  courts  regarded 
them  as  agreements  in  restraint  of  trade.  But  in  1871  a  law  was 
passed  which  declared  that  the  purposes  and  actions  of  trades 
unions  were  not  to  be  deemed  unlawful  as  being  in  the  restraint 
of  trade,  and  in  1875  the  legality  of  trades  unions  was  still  further 
recognized  by  the  provision  that  acts  which  were  not  punishable 
as  crimes  when  done  by  one  person  should  not  be  indictable  as 
conspiracy  when  done  by  two  or  more  in  furtherance  of  trade  dis- 
pute, and  finally,  in  1906,  the  courts  were  forbidden  to  entertain 


54  OUTLINES   OF  ECONOMICS 

actions  for  damages  against  trades  unions.  In  this  same  year 
peaceful  picketing  was  legalized. 

(4)  The  Extension  of  Government  Enterprise.  —  The  reaction 
against  a  laissez-faire  policy  is  further  shown  by  a  growth  in  the 
sphere  of  industry  directly  managed  by  the  government.  We  find 
municipalities  operating  street  railways  and  furnishing  water,  gas, 
and  electric  light.  Municipal  enterprise  includes  also  in  various 
places  markets,  docks,  dwellings,  baths,  race  courses,  oyster  fish- 
eries, slaughterhouses,  milk  depots,  employment  bureaus,  sewage 
farms,  theaters,  and  many  other  lines  of  activity.  Again,  the  na- 
tional government  conducts  the  postal  savings  banks,  the  parcels 
post,  and  the  telegraph  and  telephone  systems. 

Summary.  —  In  this  chapter  a  brief-  sketch  has  been  given  of 
England's  attempt  to  deal  with  a  new  set  of  forces.  An  immense 
increase  in  production  has  taken  place,  due  in  part  to  competition, 
more  to  machinery.  But  the  distribution  of  this  wealth,  growing 
directly  out  of  the  principles  of  competition  so  long  as  they  were 
unrestrictedly  applied,  was  such  that  poverty  grew  rapidly,  and 
some  said  even  faster  than  wealth,  and  the  laboring  population 
of  the  realm  sank  into  deeper  distress  and  degradation.  The  par- 
tial benevolence  of  employers,  which  would  fain  have  mitigated 
this  disaster,  was,  as  a  rule,  neither  welcomed  nor  tolerated  by  the 
competition  which  had  made  itself  law.  Not  until  this  benevo- 
lence was  formulated,  generalized,  and  enforced  by  disinterested 
legislation  was  the  horror  of  the  situation  diminished.  When  we 
hear  the  principle  of  "a  fair  field  and  no  favor"  and  "no  State 
intervention"  advocated  by  a  man  strong  in  the  consciousness  of 
personal  advantages,  we  must  remember  that  he  is  a  century  be- 
hind his  time,  and  that  he  has  not  read  or  has  not  profited  by  one  of 
the  most  dolorous  chapters  in  human  history.  The  English  nation, 
after  a  trial  of  free  competition  and  no  interference,  as  thorough 
as  could  well  be  made,  has  undeniably  returned  to  the  principle 
of  governmental  activity  which  she  had  abandoned,  —  a  principle 
which  recognizes  as  the  function  of  the  State  the  protection 
of  the  citizens,  and  the  furtherance  of  their  material  and  social 
well-being,  by  every  law  and  every  activity  which  offers  a  reasona- 
ble guarantee  of  contributing  to  that  end.  It  is  to  be  noticed  fur- 


THE   EVOLUTION   OF   ECONOMIC   SOCIETY  55 

thermore  that,  as  a  matter  of  fact,  all  this  activity  of  the  State  con- 
tributing to  material  and  social  well-being  has  also  increased  free- 
dom as  a  positive,  constructive  force.  It  has  promoted  the  growth 
of  individual  powers  and  enlarged  the  scope  of  activity  of  the 
average  citizen.  It  has  not  tended  to  slavery,  as  Herbert  Spencer 
long  ago  maintained,  but  its  tendency  has  been  in  the  direction  of 
the  sort  of  liberty  that  is  really  worth  while ;  namely,  liberty  as  a 
power  of  development  and  of  contributing  (in  the  words  of  the 
philosopher  T.  H.  Green)  to  the  "common  good." 

QUESTIONS  AND  EXERCISES 

1.  What  is  the  origin  of  the  terra  "  laissez-faire  "  ? 

2.  What  laws  are  in  force  in  your  state  regarding  the  inspection  of  food  and 
other  articles  offered  for  sale? 

3.  Give  a  detailed  account  of  the  development  of  one  of  the  great  inven- 
tions. 

4.  Give  a  sketch  of  the  enactment  and  repeal  of  the  "corn  laws." 

5.  Give  an  account  of  the  development  of  monopolies  and  trusts  in  Eng- 
land. 

REFERENCES 

BEARD,  C.     The  Industrial  Revolution. 

CHEYNEY,  E.  P.     Industrial  and  Social  History  of  England,  Chaps.  VIII 

and  IX. 
CUNNINGHAM,   W.     Growth  of  English    Industry  and  Commerce,   Modern 

Times,  Part  II.     Laissez-Faire. 

HOBSON,  J.  A.     Evolution  of  Modern  Capitalism,  Chaps.  Ill  and  IV. 
HOWE,  F.  C.     "  Municipal  Ownership  in  Great  Britain,"  Bulletin  of  the 

United  States  Bureau  of  Labor,  January,  1906. 

HUTCHINS  and  HARRISON,  A.  A  History  of  Factory  Legislation,  Chap.  II. 
PRICE,  L.  L.  Short  History  of  English  Commerce  and  Industry,  Chaps.  IX 

andX. 
TAYLOR,  H.  C.    "  The  Decline  of  Land-owning  Farmers  in  England,"  Bulletin 

of  the  University  of  Wisconsin,  Economics  and  Political  Science  Series, 

No.  142. 

TOYNBEE,  A.     The  Industrial  Revolution. 
VEBLEN,  T.  B.     The  Theory  of  Business  Enterprise,  Chap.  IV. 


CHAPTER  V 
THE  ECONOMIC  DEVELOPMENT  OF  THE  UNITED  STATES 

THE  economic  development  of  the  United  States  has  in  some 
respects  been  very  unlike  the  economic  development  of  England, 
and  yet  very  like  it  in  other  respects.  Let  us  note  in  the  first  place 
the  points  of  difference,  the  factors  and  characteristics  of  our  eco- 
nomic history  which  are  peculiarly  American. 

Economic  Stages  in  American  Industrial  History.  —  The  transit 
of  civilization  from  Europe  to  America,  as  an  American  historian  1 
has  finely  phrased  it,  thrust  the  European  laws,  customs,  and  in- 
dustrial technique  of  the  seventeenth  century  into  the  primitive 
environment  of  a  wilderness,  and  for  the  moment  the  wilderness 
dominated.  Industry  was  forced  to  begin  at  the  beginning  and 
retrace  —  as  the  child  is  said  to  retrace  the  mental  development 
of  mankind  —  the  industrial  evolution  of  the  race. 

The  American  people  have  thus,  during  the  comparatively  brief 
historical  period  which  has  elapsed  since  the  settlement  of  this 
country,  run  the  whole  gamut  of  industrial  evolution,  passing 
through  with  striking  rapidity  all  the  stages  differentiated  in  the 
preceding  chapters.  There  was  slaughter  of  captives  in  the  In- 
dian wars,  enslavement  of  Indians,  particularly — but  not  only  — 
in  the  Spanish  colonies,  later  the  introduction  of  negro  slavery 
and  modified  serfdom  in  the  bond  or  indented  servants,  then 
the  individual  wage  contract,  still  supreme  among  agricultural 
laborers,  and  finally,  collective  bargaining  through  the  great 
trades  unions  of  the  present  generations.  In  a  similar  way, 
practically  all  the  stages  differentiated  in  the  table  given  on  page 
40  may  be  traced  in  the  industrial  evolution  of  the  United 
States. 

1  Edward  Eggleston,  Transit  of  Civilization,  New  York,  1900. 
56 


ECONOMIC  DEVELOPMENT   OF  THE   UNITED   STATES     57 

Naturally  it  is  not  to  be  supposed  that  American  industrial  so- 
ciety worked  its  own  way  unaided  through  all  those  economic 
stages  which  the  race,  with  "painful  steps  and  slow,"  has  labori- 
ously traversed  in  its  upward  march.  Stimulated  by  European 
culture,  we  hurried  through  the  earlier  stages,  for  the  most  part, 
retracing  them  merely  as  an  incident  of  frontier  conditions,  and 
skipping  some  —  such  as  the  pastoral  stage  —  in  many  sections 
of  the  country.  On  the  other  hand,  it  must  not  be  inferred  that 
we  have  everywhere  passed  beyond  the  so-called  primitive 
stages.  Barter  is  still  the  commonest  mode  of  exchange  in  some 
parts  of  the  country,  and  there  are  comparatively  few  rural  dis- 
tricts in  which  credit  transactions  have  in  the  main  taken  the 
place  of  money  transactions.  It  is  interesting  to  observe  that, 
owing  to  the  progressive  Western  movement  of  the  population  of 
the  country,  the  stages  in  the  history  of  man's  productive  efforts 
appeared  in  regular  order  from  West  to  East.  Thus,  a  few  years 
ago,  the  country  of  the  frontier  was  occupied  by  hunters  and 
trappers;  next  were  great  stretches  of  country  almost  entirely  de- 
voted to  grazing;  farther  east,  agriculture  predominated;  trade 
and  commerce  were  active,  especially  in  the  country  east  of  the 
Mississippi;  manufacture  on  a  large  scale  was  prominent  in  the 
North  Atlantic  and  North  Central  groups  of  states;  while  finally 
the  large  industrial  combinations  which  mark  the  latest  step  in 
development  were  confined  (with  respect  to  legal  residence  at 
least)  to  the  Atlantic  seaboard. 

Sectionalism.  —  This  phenomenon  of  the  contemporaneous  ex- 
istence of  several  industrial  stages,  side  by  side,  under  the  same  gov- 
ernment, has  laid  upon  this  country  some  of  the  hardest  problems 
which  it  has  had  to  solve.  The  ever  present  but  ever  reced- 
ing frontier  has  continually  created  a  set  of  interests  antagonis- 
tic to  those  of  the  settled  industrial  and  commercial  communities. 
Shays's  Rebellion  in  1786  was  in  part  a  protest  of  the  more 
thinly  settled  debtor  communities  against  the  determination  of 
the  commercial  centers  to  introduce  the  sound  currency  which  a 
developed  commerce  requires.  The  federal  Constitution  was 
adopted  and  the  present  government  created  in  order,  largely, 
to  strengthen  national  credit,  insure  taxation,  remove  trade 


58  OUTLINES  OF  ECONOMICS 

barriers,  and  provide  a  sound  currency;  and  the  opposition  to  the 
ratification  of  the  Constitution  came  largely  from  those  agricul- 
tural and  thinly  settled  communities  that  wanted  to  keep  paper 
money,  evade  debt  payment,  and  resist  the  collection  of  taxes. 
During  the  earlier  history  of  the  country  wildcat  banking  and  in- 
flated currency  regularly  followed  in  the  wake  of  the  frontier. 

Tariff  legislation,  with  its  different  appeal  to  the  agricultural 
and  industrial  sections  of  the  country,  has  been  another  prolific 
source  of  territorial  conflict.  After  the  War  of  1812,  the  manu- 
facturing centers  of  the  North  redoubled  their  efforts  for  protec- 
tion. This  was  strenuously  resisted  by  the  South,  where  manu- 
factures had  practically  gained  no  hold,  and  the  struggle  of  the 
sections  over  the  tariff  led  to  Nullification  in  South  Carolina  and 
the  acceptance  by  the  South  of  the  doctrine  of  secession.  The 
Civil  War  itself  was  largely  a  sectional  quarrel  growing  out  of 
ceaseless  friction  between  a  section  which  had  reached  the  indus- 
trial stage  and  a  condition  of  free-wage  contract  with  a  section 
which  had  been  held  in  the  agricultural  stage  by  the  retention  of 
slavery.  As  a  late  illustration  of  sectional  conflict  arising  from 
the  natural  clash  of  districts  in  different  stages  of  economic  devel- 
opment, we  have  the  free-silver  campaign  of  1896,  when  the  min- 
ing, agricultural,  and  debtor  communities  of  the  West  and  South 
arrayed  themselves  against  the  industrial  and  creditor  communi- 
ties of  the  East  and  North.  The  typical  political  struggles  of  the 
past  have  been  territorial  and  sectional;  now  that  the  frontier 
has  disappeared,  the  typical  political  struggles  of  the  future  will 
take  the  form,  possibly,  of  class  against  class. 

Characteristics  of  the  American  People.  —  Although  the  frontier 
has  disappeared,  the  pioneer  work  of  "winning  a  continent  from 
nature  and  subduing  it  to  the  uses  of  man"  has  left  an  indelible 
impress  upon  the  American  character.  In  the  beginning  the  dan- 
gers and  hardships  of  the  frontier  acted  as  a  powerful  selective 
force  in  determining  the  character  of  our  earlier  immigrants,  giv- 
ing us  an  unusually  restless,  mobile,  and  enterprising  people.  The 
process  of  settlement  which  followed  merely  emphasized  these 
qualities  and  added  others  of  a  kindred  nature.  The  primitive 
settler,  following  the  trapper  and  the  trader  into  the  wilderness, 


ECONOMIC   DEVELOPMENT   OF  THE    UNITED   STATES     59 

was  forced  to  depend  upon  himself  for  protection  and  subsistence; 
he  expected  little  aid  from  the  government,  was  unused  to  the 
restraints  of  law,  and  a  little  contemptuous  of  its  possibilities,  either 
for  good  or  for  evil.  The  process  of  settlement,  then,  merely  con- 
firmed the  American  in  that  excessive  individualism  which  has 
made  him  independent  and  resourceful,  to  be  sure,  but  partial  to 
the  spoils  system,  tolerant  of  lynch  law  and  labor  violence,  indif- 
ferent to  waste  and  weakness  in  the  administration  of  his  govern- 
ment. 

At  the  same  time  the  great  natural  wealth  of  our  land  and  the 
ease  with  which  it  could  be  secured  from  the  government  have 
taught  our  people,  particularly  in  the  West,  to  regard  nature  rather 
than  thrift  as  the  source  of  wealth,  to  exploit  rather  than  create, 
to  work  and  study  as  we  farm  —  extensively.  As  a  people,  we  are 
optimistic  but  careless,  generous  but  wasteful,  buoyant  but  boast- 
ful. Industrially,  we  have  risen  to  our  exceptional  opportunities 
with  spirit,  playing  the  commercial  game  at  times  with  excessive 
energy  and  devotion;  but  we  have  come  to  emphasize  quantity 
rather  than  quality,  product  rather  than  finish.  We  "lead  the 
world"  in  the  use  of  labor-saving  machinery,  but  depend  largely 
upon  Europe  for  our  skilled  artisans. 

Growth  of  Population.  —  The  mere  growth  of  the  American  peo- 
ple has  been  as  striking  as  it  is  familiar.  In  1640  there  were  about 
25,000  persons,  excluding  Indians,  in  British  North  America; 
about  260,000  at  the  end  of  the  seventeenth  century  according  to 
Bancroft;  according  to  the  same  authority  the  million  mark  was 
reached  in  1743;  and  in  1790  the  first  federal  census  showed  a 
population  of  3,929,214  in  the  United  States  alone.  In  the  next 
hundred  years  the  population  doubled  every  twenty-five  years  on 
an  average,  and  although  the  rate  of  increase  has  fallen  off  some- 
what since  the  Civil  War,  we  are  still  growing  at  a  marvelous  pace, 
the  population  of  continental  United  States  being  estimated  at 

82,574,195  in  ^QS- 

Despite  this  enormous  increase,  there  has  been  at  no  time  any 
evidence  that  the  population  of  this  country  was  multiplying  more 
rapidly  than  the  means  of  subsistence.  Wages  and  incomes  in 
general  have  risen,  not  without  interruption,  but  with  compara- 


60  OUTLINES   OF   ECONOMICS 

tive  steadiness,  over  long  periods;  and  the  dismal  predictions  of 
overpopulation  which  were  so  common  in  the  first  half  of  the  nine- 
teenth century  have  been  signally  discredited  as  practical  propo- 
sitions applicable  to  the  American  people  of  this  epoch.  The 
exploitation  of  national  wealth,  the  perfection  of  business  organi- 
zation, and  the  invention  of  labor-saving  machinery  have  more 
than  kept  pace  with  the  population;  and  it  has  been  discovered 
that  over  long  periods  prosperity  and  high  wages  tend  to  depress 
rather  than  to  raise  the  birth  rate,  even  of  the  wage-earning  popu- 
lation. We  are  in  no  danger  of  a  "  devastating  torrent  of  chil- 
dren." 

On  the  contrary,  the  real  problem  of  the  twentieth  century,  or 
at  least  the  problem  that  has  evoked  the  greatest  discussion,  is 
found  in  the  steady  decline  of  the  birth  rate.  According  to  some 
of  the  most  eminent  authorities,  the  race  is  dying  at  the  top,  the 
ablest  and  most  successful  people  have  the  smallest  families;  and 
this  constant  sterilization  of  the  ablest  stock  of  the  race  is,  in  the 
opinion  of  such  authorities,  second  in  importance  to  no  problem 
which  Western  civilization  is  called  upon  to  solve.  It  is  not  that 
we  want  more  people.  Population  is  still  increasing  with  suffi- 
cient rapidity.  The  problem  lies  in  the  apparent  failure  of  the 
most  efficient  individuals  to  multiply  as  rapidly  as  certain  classes 
of  the  less  efficient.  Other  authorities,  it  should  be  added,  main- 
tain that  this  "race  suicide"  has  been  going  on  for  centuries,  that 
it  has  not  in  the  past,  and  will  not  in  the  future,  lower  the  vitality 
or  general  efficiency  of  the  race.  Such  writers  view  with  compla- 
cency the  ceaseless  sterilization  of  the  upper  classes,  maintaining 
that  the  process  stimulates  the  ambition  of  the  abler  members  of 
the  lower  classes  by  creating  room  at  the  top,  and  that  so  long  as 
the  habits  and  ideals  of  the  upper  classes  remain  wholesome,  there 
is  no  cause  for  regret  that  the  individuals  who  compose  these 
classes  are  not  self-perpetuating.  Social  heredity,  not  personal 
heredity,  the  preservation  of  sound  morals,  wholesome  customs, 
and  habits  of  social  helpfulness,  together  with  the  opening  up  of 
new  opportunities,  are  the  important  factors. 

Second  only  in  importance  to  "race  suicide,"  and  intimately 
connected  with  it,  is  the  problem  created  by  the  rush  to  the  city. 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED    STATES     6l 

In  1790  about  33  Americans  in  every  thousand  lived  in  a  city  of 
8000  inhabitants  or  more,  in  1900  more  than  33  in  every  hundred 
lived  in  a  city  of  this  size.  The  mere  facts  in  this  connection  are 
familiar  to  every  one  and  need  no  elaboration.  Their  importance 
lies  in  the  fact  that  the  rush  to  the  city  is  apparently  universal, 
that  it  has  been  going  on  for  centuries,  and  that  it  indefinitely  com- 
plicates and  aggravates  the  social,  industrial,  and  political  prob- 
lems of  our  time.  "Race  suicide,"  for  example,  is  more  attribu- 
table to  social  conditions  created  by  city  life  than  to  any  physical 
incapacity  of  the  women  of  this  generation  to  bear  children;  the 
evils  commonly  charged  to  the  factory  system  are  due  as  much 
to  city  crowding  as  to  the  factory  system  itself;  and,  speaking  gen- 
erally, whatever  plan  of  reform  for  existing  evils  we  devise  or 
champion,  we  must  reckon  with  this  deep-rooted  and  persistent 
force  which  draws  to  the  city  so  much  of  the  best  talent  and  abil- 
ity which  the  rural  districts  produce. 

Slavery  and  the  Negro  Problem.  —  From  the  earliest  period  of 
settlement,  one  of  our  fundamental  industrial  problems  has  been 
to  get  enough  labor  to  exploit  the  great  national  wealth  of  the 
country.  The  first  solution  attempted  was  by  importing  bonds- 
men or  indentured  servants.  "Nearly  all  the  immigrants  that 
came  (to  Virginia)  between  1620  and  1650  were  bondsmen,"  and 
in  1680  an  English  official  estimated  that  about  10,000  persons 
were  kidnaped  or  "spirited  away"  to  America  every  year.  This 
class  of  indentured  servants  consisted  of  runaway  apprentices, 
penniless  debtors,  kidnaped  children,  honest  laborers,  vagrants, 
and  criminals  of  all  kinds.  They  were  sometimes  subject  to  the 
most  inhuman  treatment,  but,  because  they  had  white  skins,  soon 
melted  into  the  free  population  and  never  created  a  race  problem. 

The  first  negro  slave  landed  in  Virginia  in  1619.  For  about 
thirty  years  they  did  not  increase  very  rapidly,  but  after  that,  and 
until  the  close  of  the  eighteenth  century,  they  multiplied  with 
greater  rapidity  than  the  white  population.  In  1790  there  were 
750,208  negroes  or  persons  of  negro  descent  in  this  country,  con- 
stituting 19.3  percent  of  the  population.  Since  1790  the  negro 
population  has  steadily  declined  in  relative  importance,  and  in 
1900,  numbering  8,840,789  in  all,  it  constituted  only  n.6  percent 


62  OUTLINES   OF   ECONOMICS 

of  the  general  population.  The  relative  decline  of  the  negro  popu- 
lation is  probably  not  due  to  white  immigration,  since  the  natural 
growth  of  the  white  population  is  markedly  greater  than  that  of 
the  negroes  in  the  South,  where  white  immigration  has  been  un- 
important. 

The  negro  problem  to-day,  in  so  far  as  it  is  an  economic  as  dis- 
tinguished from  a  political  or  social  problem,  arises  from  the  tend- 
ency of  the  negroes  to  concentrate  in  the  cities  and  in  a  narrow 
district  of  the  cotton-growing  states  known  as  the  black  belt; 
from  their  shiftlessness,  their  ignorance,  their  dependence  upon 
credit  advances  in  the  farming  districts,  and  their  alarming  con- 
centration in  a  few  occupations,  some  of  which  —  particularly  as 
they  practice  them  —  are  neither  educational,  uplifting,  nor  devel- 
opmental. In  1900,  for  instance,  63  per  cent  of  the  male  and  90 
per  cent  of  the  female  negro  breadwinners  were  employed  in  un- 
skilled trades,  and  the  proportion  confined  to  the  unskilled 
trades  shows  no  signs  of  diminishing.  This  condition  of  affairs  is 
due  in  some  degree  to  the  economic  inertia  and  shiftlessness  of 
the  negroes  themselves,  but  it  is  also  due  in  part  to  the  race  preju- 
dice of  their  white  brethren,  which,  unfortunately,  shows  no  abate- 
ment with  the  passage  of  time.  The  trades  unions,  for  instance, 
evince  a  growing  disinclination  to  receive  negroes  as  members  on 
the  same  status  as  white  workingmen.  Vigorous  efforts  are  now 
being  made  in  the  South  to  provide  industrial  training  of  a  sys- 
tematic kind  for  the  negroes,  and  in  the  future  the  rather  men- 
acing movement  of  the  present  day  may  be  checked  or  wholly 
reversed. 

Immigration.  —  Next  in  importance  to  the  negro  question  is 
the  problem  of  immigration.  We  have  always  had  an  immigra- 
tion problem.  "Governor  Thomas  Dongan,  in  1685,  made  a  re- 
port to  the  King  of  England  full  of  dreadful  forebodings  as  to  the 
future  of  the  'Royal  Province'  of  New  England  unless  the  tend- 
ency to  overcrowding  were  promptly  checked.  .  .  .  George  Wash- 
ington and  Thomas  Jefferson  are  both  recorded  as  opponents  of 
an  unrestricted  policy  of  immigration,  and  it  may  be  safely  asserted 
that  no  considerable  period  has  elapsed  since  their  day  without 
producing  eloquent  and  forceful  advocates  of  a  rigid  restrictive 


ECONOMIC  DEVELOPMENT  OF  THE   UNITED   STATES     63 

immigration  policy."  1  Owing,  however,  to  the  extraordinary  in- 
crease of  immigrants  in  recent  years  —  the  number  rose  from 
223,299  in  1898  to  1,285,349  in  1907  —  unusual  interest  in  the 
subject  has  been  aroused,  the  restrictive  features  of  our  law  have 
been  repeatedly  strengthened,  and  a  commission  has  been  ap- 
pointed by  Congress  to  investigate  the  subject. 

Most  of  the  alarm  which  has  recently  been  expressed,  however, 
is  due  to  the  change  in  character,  rather  than  the  increase  in  vol- 
ume, of  our  immigration.  Instructive  statistics  bearing  upon  this 
point  are  given  in  Table  I  on  the  following  page.  From  this 
table  it  appears  that  until  nearly  the  last  decade  of  the  nineteenth 
century,  most  of  the  immigrants  came  from  the  United  Kingdom, 
Germany,  and  northwestern  Europe,  while  since  that  time  the 
arrivals  have  been  largely  from  southern  Europe;  and  it  is  charged 
that  the  new  immigrants  are  more  illiterate,  more  given  to  crime, 
of  poorer  physique,  and  possessed  of  less  property  than  the  earlier 
immigrants.  "These  people,"  it  has  been  said,  "have  no  history 
behind  them  which  is  of  a  nature  to  give  encouragement.  They 
have  none  of  the  inherited  instincts  and  tendencies  which  made 
it  comparatively  easy  to  deal  with  the  immigration  of  the  earlier 
time.  They  are  beaten  men  from  beaten  races,  representing  the 
worst  failures  in  the  struggle  for  existence.  Centuries  are  against 
them,  as  centuries  were  on  the  side  of  those  who  formerly  came 
to  us."  2 

There  can  be  no  doubt  about  the  real  gravity  of  the  problem. 
In  times  past  charitable  associations,  and  even  certain  foreign  gov- 
ernments, "assisted"  the  poorest  and  neediest  of  their  citizens  to 
migrate  to  this  country;  famine  and  revolution  in  Europe  spurred 
the  impecunious  and  the  radical  to  take  refuge  among  us;  regu- 
larly, also,  the  tide  of  immigration  has  ebbed  and  risen  in  close 
correspondence  with  the  business  prosperity  of  this  country,  arti- 
ficially swelling  our  laboring  population  in  times  of  industrial  ac- 
tivity, encouraging  our  industrial  managers  in  their  spasmodic, 
jerky  methods  of  production,  and  thus  augmenting  the  severity  of 

1  Commissioner  of  Immigration,  Robert  Watchorn,  in  The  Outlook,  Vol.  87, 
p.  900. 

*  Walker,  Discussions  in  Economics  and  Statistics,  "  Restriction  of  Immigra- 
tion," p.  447. 


OUTLINES   OF  ECONOMICS 


our  alternating  periods  of  industrial  depression.  Moreover,  in 
certain  industries  the  immigrant  with  his  relatively  low  standard  of 
living  has  driven  out  the  native  workman;  and  most  of  the  immi- 
grants have  shown  an  unfortunate  tendency  to  linger  in  the  cities 
of  the  eastern  seaboard,  swarming  in  the  slums  and  intensifying 
all  those  social  evils  which  have  their  origin  in  urban  congestion. 
In  the  light  of  history,  on  the  other  hand,  the  immigration  prob- 
lem is  far  less  alarming  than  it  is  in  the  dry  light  of  recent  statistics. 
In  the  first  place,  the  statistics  themselves,  as  ordinarily  published, 

TABLE  I 

TOTAL  NUMBER  OF  IMMIGRANTS  (IN  THOUSANDS)  AND  PROPORTION  COMING 
FROM  DESIGNATED  COUNTRIES  BY  SPECIFIED  PERIODS  :  1821-1906.' 


1821 

1851 

1861 

1871 

1881 

1891 

1901 

1850 

1860 

1870 

1880 

1890 

1900 

1906 

Total  Number,  ooo 

omitted  

241:6 

2?o8 

2TIC. 

2812 

C247 

3844 

4074 

Per  cent 

Germany  

24.  2 

36.6 

34.0 

2?.  6 

27.7 

14.1 

4.7 

Great  Britain  

I    .O 

16.1 

26.2 

IQ.  <; 

115.4 

8.0 

e.4 

Ireland  

42.3 

•1C.  2 

18.8 

ic.e 

12.1; 

IO.S 

4.4 

Norway,  Sweden,  and 

Denmark  

0.7 

0.9 

5-4 

8.6 

12-5 

9-9 

7.0 

Total 

82.2 

89.0 

84.4 

69.2 

68.1 

43-4 

21.  1 

Austria  Hungary     .     . 

O  4. 

2.6 

6  7 

Itrc 

24  C. 

Italy  

O.2 

O.T 

O.C. 

2.O 

C.Q 

17.1 

2C..O 

Russia  and  Poland.  .  .  . 

O.I 

O.I 

O.2 

1.8 

S-° 

15-4 

17.7 

Total 

o-3 

0.4 

I.I 

6.4 

17.6 

48.0 

67.2 

All  other  Countries.  .  . 

i7-S 

10.6 

I4-S 

24.4 

14-3 

8.6 

II.7 

Grand  Total 

IOO. 

IOO. 

IOO. 

IOO. 

IOO. 

IOO. 

IOO. 

f  Data  from  Adams  and  Sumner  :  Labor  Problems,  p.  73,  and  the  Statistical  Abstract, 
1006,  p.  56.  These  figures  are  not  exact  and  not  altogether  comparable,  owing  to  changes  in 
the  immigration  year,  the  distinction  of  nationalities,  and  the  immigration  laws.  For  the  ef- 
fect of  these  changes,  see  Boeckh  :  The  Determination  of  Racial  Stock  among  American  Im- 
migrants, Publications  of  the  American  Statistical  Association,  December,  1006  ;  and  Willcox, 
National  Civic  Federation  Review,  November,  December,  1906,  p.  7. 


ECONOMIC  DEVELOPMENT   OF  THE  UNITED   STATES     65 

are  misleading,  because  they  take  no  account  of  the  large  number 
of  immigrants  who  return  to  Europe.  In  the  second  place,  the 
importance  of  the  number  of  immigrants  depends  largely  upon 
its  relation  to  the  population  of  the  country;  and  relative  to  the 
population  immigration  seems  to  be  declining  rather  than  increas- 
ing. For  instance,  immigration  reckoned  in  proportion  to  the 
population  was  heavier  in  the  period  1850-1855  than  in  the  period 
1900-1905.  In  the  next  place,  the  attraction  of  the  city  for  the 
immigrant  has  been  exaggerated.  While  a  great  majority  of  the 
immigrants  are  forced  to  locate  temporarily  in  our  large  seaboard 
cities,  the  later  and  more  trustworthy  studies  indicate  that  the 
immigrants  are  less  rather  than  more  disposed  to  remain  perma- 
nently in  the  cities  than  our  native  population,  and  that  the  new 
immigrants  show  no  greater  tendency  to  stagnate  in  the  cities  than 
the  earlier  immigrants.  Finally,  it  is  to  be  noted  that  our  immi- 
gration laws  regarding  the  exclusion  of  diseased,  criminal,  im- 
moral, feeble-minded,  and  indigent  persons  are  constantly  becoming 
stricter  and  their  administration  more  efficient.  In  addition  to 
the  plainly  undesirable  classes  just  noted,  Chinese  laborers  have 
been  excluded  since  1882,  aliens  under  contract  to  take  up  par- 
ticular work  since  1885,  and  anarchists  since  1903. 

Surveying  the  whole  history  of  immigration,  three  general  con- 
clusions may  be  drawn  which  must  be  fully  considered  by  those 
engaged  in  the  solution  of  the  present  problem. 

(i)  We  have,  as  a  people,  shown  a  marvelous  ability  to  assimi- 
late rapidly  people  of  diverse  races,  tongues,  and  religions,  amal- 
gamate them  and  stamp  them  with  the  characteristic  qualities  of 
the  American.  Even  at  the  close  of  the  eighteenth  century,  about 
one  fifth  of  the  population  spoke  some  other  language  than  Eng- 
lish as  their  mother  tongue,  and  probably  one  half  of  the  popula- 
tion were  of  other  than  Anglo-Saxon  blood.  The  heterogeneous 
character  of  the  population  is  illustrated  by  the  fact  that  nine  of 
the  men  most  prominent  in  the  early  history  of  New  York  repre- 
sented as  many  different  nationalities.  (2)  We  have  failed,  how- 
ever, to  amalgamate  the  negro  and  the  Chinese;  the  incidental 
feature  of  a  dark  skin  creates  especially  difficult  problems;  and 
it  is  this  fact  which  makes  the  suggested  exclusion  of  Japanese 


66  OUTLINES   OF  ECONOMICS 

laborers  worthy  of  serious  consideration.  The  high  qualities  of 
the  Japanese,  their  industry,  intelligence,  and  native  refinement 
make  them  in  many  respects  the  most  desirable  kind  of  immi- 
grants; but  it  is  conceivable  that  they  might  come  to  this  country 
in  sufficient  numbers  to  create  a  problem  similar  in  character  and 
gravity  to  the  negro  problem;  and  if  investigation  show  that  there 
is  real  probability  of  such  a  result,  they  should  be  excluded,  even 
though  the  danger  be  attributable  to  race  prejudice  of  the  natives 
rather  than  the  clannishness  and  exclusiveness  of  the  Japanese 
themselves.  (3)  In  the  main,  however,  the  traditional  policy  of 
this  country  has  been  "to  improve  rather  than  to  check  immigra- 
tion," and  the  burden  of  proof  is  upon  those  persons  who  would 
restrict  immigration  by  arbitrarily  limiting  the  number  of  immi- 
grants. 

Natural  Resources.  —  Next  to  the  character  of  the  people  with 
which  this  continent  has  been  stocked,  the  most  powerful  factor 
in  shaping  the  economic  development  of  the  United  States  has 
been  its  enormous  natural  wealth.  With  a  territory  (excluding 
Alaska  and  our  insular  possessions)  more  than  three  fourths  as 
large  as  all  Europe,  indented,  particularly  on  the  eastern  coast, 
with  a  large  number  of  good  harbors,  intersected  by  internal  water- 
ways that  make  communication  cheap  and  easy,  endowed  with 
water  power  that  in  the  opinion  of  one  authority  is  probably  "more 
valuable  than  those  of  all  other  lands  put  together,"  marked  by 
every  variety  of  climate  and  soil,  covered  in  many  places,  at  least 
originally,  with  magnificent  forests,  and  liberally  stocked  with 
almost  every  variety  of  mineral  wealth,  it  is  not  surprising  that  at 
the  present  time  the  United  States  "leads  the  world"  in  the  pro- 
duction of  iron  and  steel,  cotton,  coal,  coffee,  gold,  silver,  dairy 
products,  corn,  wheat,  lead,  lumber,  tobacco,  petroleum,  and  hogs. 
It  would  be  strange,  indeed,  with  the  vast  mineral  and  agricultural 
resources  at  our  command,  if  we  did  not  "lead  the  world"  in 
many  things. 

Of  the  2,972,584  square  miles  of  territory  in  continental  United 
States,  about  three  fourths  at  one  time  or  another  has  belonged  to 
the  central  government.  The  possession  of  this  vast  common  treas- 
ure by  the  United  States  has  played  an  important  part  in  digni- 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED   STATES      67 

fying  and  strengthening  the  federal  government.  But  the  lavish 
alienation  of  the  public  lands  in  endowing  free  schools,  subsidiz- 
ing railways,  and  other  internal-improvement  companies,  and  in 
providing  free  homes  for  the  landless,  has  been  an  even  more  po- 
tent factor  in  hastening  our  economic  development;  even  though 
it  has  led,  as  has  been  said  with  some  justification,  "to  the  ravish- 
ment rather  than  the  development  of  our  natural  resources."  The 
public  domain  and  its  disposition  are  discussed  at  some  length 
in  a  later  chapter,  but  one  aspect  of  this  subject  —  the  part  which 
free  land  has  played  in  our  economic  development  —  is  so  vitally 
important  that  it  requires  special  notice  at  this  point. 

While  it  was  not  until  the  passage  of  the  Homestead  Act  in 
1862  that  land  could  be  legally  acquired  without  cost  by  simple 
occupation  and  cultivation,  it  is  practically  true  to  say  that  since 
the  seventeenth  century  any  enterprising  citizen,  by  the  exercise 
of  a  minimum  amount  of  industry  and  frugality,  could  secure  a 
homestead  large  enough  to  support  himself  and  family.  This  op- 
portunity offered  to  the  artisan  a  free  choice  between  wage  ser- 
vice and  farming,  constantly  depleted  the  ranks  of  mere  laborers, 
operated  to  keep  wages  at  least  as  high  as  the  earnings  of  a  "  no- 
rent"  homestead,  and  kept  fresh  and  vigorous  that  sturdy  feeling 
of  independence  that  has  been  the  distinguishing  mark  of  the 
American  workingman.  By  1904,  for  instance,  the  national  gov- 
ernment had  given  away,  under  the  Homestead  and  Timber  Cul- 
ture Acts,  106,240,464  acres  of  land;  and  in  addition  to  this, 
278,001,612  acres  had  been  sold  at  less  than  cost,  that  is,  at  less 
than  the  cost  of  acquisition,  management,  survey,  patenting,  and 
the  like. 

How  long  the  public  lands  will  hold  out  it  is  impossible  to  say. 
Notwithstanding  the  fact  that  the  national  government  is  dispos- 
ing of  its  lands  at  the  rate  of  from  fifteen  to  twenty  million  acres 
a  year,  there  is  still  left  —  if  we  count  Alaska  —  almost  as  much 
territory  as  we  have  alienated  since  the  adoption  of  the  Constitu- 
tion. Much  of  this  is  worthless  or  unavailable;  but  irrigation  and 
dry  farming  are  constantly  reclaiming  large  districts  formerly  re- 
garded as  worthless,  and  the  railways  and  some  of  the  Western 
states  still  possess  large  quantities  of  ordinary  farming  land  which, 


68  OUTLINES   OF  ECONOMICS 

fortunately,  they  are  willing  to  sell  at  low  prices.  All  in  all, 
we  are  tempted  to  say,  there  is  still  enough  cheap  land  to  exert  in 
the  West  that  influence  upon  industry,  wages,  and  the  distribution 
of  wealth  generally  which  has  come  to  be  the  distinguishing 
mark  of  the  American  social  economy.  But  this  is  a  matter  of 
dispute. 

Fifteen  sixteenths  of  the  population  reside  in  the  eastern 
half  of  the  United  States,  and  in  the  East  land  has  become  costly, 
trade  and  manufactures  taken  together  have  outstripped  agricul- 
ture, and  a  large  majority  of  the  people  lack  the  inclination  and 
necessary  training,  even  if  they  possessed  the  courage  and  energy 
to  avail  themselves  of  the  cheap  land  of  the  West.  Whatever 
the  amount  of  this  cheap  land,  its  importance  has  diminished  and 
must  continue  to  diminish,  as  an  outlet  for  the  population  upon 
whose  economic  condition  it  formerly  exerted  so  salutary  an  influ- 
ence. Considering  the  population  as  a  whole,  the  conclusion  seems 
irresistible  that  we  have  reached,  if  indeed  we  have  not  already 
passed,  the  parting  of  the  ways;  and  the  assistance  that  in  the 
past  free  land  rendered  in  maintaining  wages  and  restraining  the 
evil  tendencies  of  the  modern  system  of  capitalistic  production 
must  in  the  future  be  secured  from  other  sources.  The  distinc- 
tive Americanism  of  the  past  was  generated,  as  has  been  said,  in  the 
performance  of  our  national  task  "of  winning  a  continent  from 
nature  and  subduing  it  to  the  uses  of  man";1  it  was  a  product 
of  the  frontier.  But  the  frontier  has  now  disappeared. 

QUESTIONS 

1.  What  peculiar  characteristics  mark  the  economic  stages  of  the  United 
States  ? 

2.  Is  the  pastoral  stage  through  which  the  people  of  our  Great  Plains  have 
passed  essentially  different  from  the  pastoral  stage  through  which  the  people 
of  Israel  passed  ? 

3.  Enumerate   the  great  sectional   struggles  which   have   disturbed  the 
United  States.     Why  does  radicalism  accompany  the  frontier? 

4.  Has  the  frontier  and  the  work  of  settlement  left  a  permanent  impress 
upon  the  American  people?     Of  what  kind? 

5.  How  rapidly  is  the  population  increasing  at  the  present  time?     Are  the 
richer  or  poorer  classes  multiplying  more  rapidly  ?     Can  you  state  the  reason  ? 

1  Bogart,    Economic  History  of  the  United  States,  p.  i. 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED   STATES     69 

6.  What  are  the  distinctively  economic  factors  of  the  negro  problem? 

7.  When  did  the  immigration  problem  first  alarm   residents  of  this 
country?     What  charges  are  directed  against  the  "newer  immigrants  "? 

8.  Have  we  shown  an  ability  to  assimilate  all  kinds  of  immigrants? 
What  has  been  the  historical  policy  of  this  country  toward  immigration  ? 

9.  What  part  did  the  public  domain  play  in  bringing  about  and  preserv- 
ing the  Union?  in  maintaining  wages? 

10.    How   does  the  growing   size  of   the  country  modify  the  influence 
exerted  by  free  land  ? 

REFERENCES 

BOGART,  E.  L.  Economic  History  of  the  United  Stales.  Contains  bibli- 
ography. 

BRUCE,  P.  A.     Economic  History  of  Virginia. 

COMAN,  KATHERINE.  The  Industrial  History  of  the  United  States.  Con- 
tains bibliography. 

COMMONS,  J.  R.     Races  and  Immigrants  in  America. 

ELY,  R.  T.     Studies  in  t)ie  Evolution  of  Industrial  Society. 

EMERY,  H.  C.  "  Economic  Development  of  the  United  States,"  in  The 
Cambridge  Modern  History,  Vol.  7,  Chap.  XXII. 

LIBBY,  O.  G.  "  The  Geographical  Distribution  of  the  Vote  of  the  Thirteen 
States  on  the  Federal  Constitution,"  1787-1788,  Bulletin  of  the  Uni- 
versity of  Wisconsin,  Economics,  Political  Science,  and  History  Series, 
Vol.  i,  No.  i. 

McMASTER,  J.  B.     A  History  of  the  People  of  the  United  States. 

McVEY,  F.  L.     Modern  Industrialism,  Part  I,  Chap.  III. 

SEMPLE,  ELLEN  C.     American  History  and  its  Geographical  Conditions. 

SHALER,  N.  S.,  Ed.     The  United  States  of  America. 

TURNER,  F.  J.  "  The  Significance  of  the  Frontier  in  American  History." 
Fifth  Yearbook  of  the  National  Herbart  Society.  First  edition  in 
Report  of  the  American  Historical  Association,  1893,  pp.  197-227. 

WEEDEN,  W.  B.     Economic  and  Social  History  of  New  England. 


CHAPTER   VI 

THE  ECONOMIC  DEVELOPMENT  OF  THE  UNITED  STATES 

(Continued) 

IN  the  preceding  chapter  attention  was  confined  to  certain  fun- 
damental and  peculiarly  American  conditions  which  have  influ- 
enced the  economic  development  of  this  country.  They  form  the 
background  and  setting  of  the  picture.  When  we  come  to  fill  in 
the  details,  however,  the  general  effect  is  very  similar  to  that  pro- 
duced by  the  description  of  English  industrial  development  given 
in  Chapter  IV.  There  are  differences,  of  course,  —  differences 
important  enough  to  make  this  separate  discussion  of  American 
economic  evolution  necessary.  But,  on  the  whole,  it  is  surpris- 
ing how  rapidly  we  have  developed  the  industrial  maladies  and 
economic  problems  of  the  old  world. 

Mercantilism  in  America.  —  In  the  American  colonies,  as  in 
England  itself,  the  Industrial  Revolution  was  preceded  by  a  period 
in  which  trade  and  industry  were  subject  to  minute  regulation  by 
the  government.  Bounties  were  freely  offered  in  several  colonies 
for  the  manufacture  of  leather,  iron,  paper,  silk,  and  cloth;  land 
grants  were  made  and  taxes  remitted  particularly  in  the  support 
of  the  iron  industry;  and  in  order  to  encourage  the  home  manu- 
facture of  shoes,  for  instance,  the  General  Court  of  Massachusetts 
in  1640  commanded  that  every  hide  "be  sent  to  a  tannery  under 
penalty  of  a,  £12  fine,"  while  "leather  searchers"  were  appointed 
to  see  that  the  law  was  obeyed. 

This  early  colonial  regulation  was  restrictive  as  well  as  protec- 
tive. In  the  New  England  colonies,  in  the  seventeenth  century, 
laws  were  repeatedly  passed  prohibiting  idleness,  fixing  the  hours 
of  labor,  and  prescribing  rates  of  wages,  with  appropriate  penal- 
ties for  workmen  who  took  or  employers  who  paid  more  than  the 

70 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED    STATES     71 

legal  rate.  In  the  Boston  Town  Records  of  1635,  for  instance, 
we  find  this  resolution:  "  That  Mr.  William  Hutchinson,  Mr.  Wil- 
liam Colborne  and  Mr.  William  Brenton  shall  sett  pryces  upon  all 
cattel,  comodities,  victuals  and  labourers  and  Workmen's  W7ages 
and  that  noe  other  prises  or  rates  shalbe  given  or  taken."  *  But 
the  restrictive  laws,  in  general,  failed  dismally.  The  abundance 
of  cheap  land  and  the  independent  spirit  generated  by  the  pioneer 
life  prevented  the  enforcement  of  obnoxious  colonial  laws,  and 
eventually  led  the  colonists  into  armed  resistance  against  the  re- 
strictive legislation  of  the  English  government. 

English  Colonial  Policy  and  the  Navigation  Acts.  —  In  accord- 
ance with  mercantilist  views  of  colonial  relationships,  English 
statesmen  of  this  period  looked  upon  a  colony  as  a  community 
which  was  to  supply  raw  materials  for  the  industries  of  the  mother 
country,  secure  its  manufactured  goods  from  the  mother  country, 
and  so  far  as  trade  with  the  rest  of  the  world  was  concerned,  buy 
and  sell  through  the  mother  country.  In  accordance  with  this 
general  policy,  England  gave  bounties  for  the  production  in 
America  of  raw  materials  such  as  flax,  indigo,  naval  stores,  barrel 
staves,  and  the  like,  but  restricted  manufacturing  proper  —  by 
prohibiting,  for  instance,  the  erection  of  mills  for  slitting  or  rolling 
iron,  and  furnaces  for  making  steel  —  and  fettered  our  commerce 
in  a  variety  of  ways.  It  is  unnecessary  to  enter  into  the  details  of 
this  conflict,  which  is  familiar  to  every  student  of  American  his- 
tory. The  English  laws  were  not  so  severe  as  might  be  inferred 
from  our  brief  statement  of  their  nature  and  purpose;  they  were 
laxly  enforced;  and  it  is  to  be  remembered  that  England  encour- 
aged some  industries  while  she  attempted  to  destroy  others.  Eng- 
lish colonial  policy  of  this  period  was  not  so  much  malicious  as 
mistaken.  The  important  points  for  us  are  these:  that  it  did 
not  seriously  hamper  the  development  of  American  industry  in  gen- 
eral, while  it  did  strengthen  and  stimulate  in  the  American  peo- 
ple that  spirit  of  individualism  which  the  industrial  opportunities 
of  the  new  world  and  the  frontier  conditions  of  the  time  combined 
to  create.  As  a  consequence  the  new  nation,  created  in  1789,  was 

1  Governor  Winthrop's  Journal,  printed  at  Hartford,  1790,  p.  188;  reprint 
of  1853,  PP-  377-38i- 


72  OUTLINES   OF  ECONOMICS 

pledged  to  the  doctrine  of  individual  liberty,  and  its  constitution 
contained  specific  guarantees  of  personal  freedom  not  only  in 
matters  political,  but  in  industrial  and  social  relationships  as  well. 

American  Industries  in  1776.  —  When  the  Revolutionary  War 
broke  out,  American  industry  was  still  in  a  primitive  stage.  The 
extractive  industries  were,  relatively,  the  most  advanced.  Large 
quantities  of  lumber  and  timber  products  were  exported  to  Eu- 
rope; the  fisheries  were  in  a  prosperous  condition;  and  shipbuild- 
ing had  reached  a  really  remarkable  stage  of  development,  —  in 
1775  "nearly  one  third  of  the  tonnage  afloat  under  the  British 
flag  had  been  built  in  American  dockyards."  Agriculture,  how- 
ever, was  carried  on  in  the  most  wasteful  and  unscientific  way, 
owing  to  the  cheapness  and  fertility  of  the  soil;  and  manufacturing 
was  still  in  the  household  stage.  In  the  Middle  and  New  England 
Colonies  spinning  and  weaving,  the  manufacture  of  shoes  and  food 
products,  were  carried  on  within  the  home;  and,  in  fact,  the  typi- 
cal farm  household  of  this  period  constituted  almost  an  independ- 
ent economic  unit,  raising  or  making  what  its  occupants  consumed, 
and  buying  little  save  salt  and  a  few  necessary  iron  implements. 
Of  manufacturing  for  sale  and  export,  however,  there  was  little 
worth  mention.  The  absence  of  adequate  means  of  transport  was 
largely  responsible  for  this  state  of  affairs.  The  roads  were  little 
more  than  widened  Indian  trails.  Some  years  later,  when  con- 
ditions were  considerably  improved,  the  roads  were  still  so  poor 
that  "  Madison  spent  a  week  going  from  New  York  to  Boston  by 
stage,  while  the  cost  of  cartage  of  a  cord  of  wood  for  a  distance 
of  twelve  miles  was  three  dollars."  Agriculture,  however,  was  the 
dominant  industry  of  the  country.  In  1787  less  than  one  eighth 
of  the  working  population  was  engaged  in  manufactures,  fishing, 
navigation,  and  trade  combined. 

The  Industrial  Revolution  in  America.  — The  Industrial  Revo- 
lution was  sudden,  and  in  its  consequences  momentous  in  America 
as  well  as  in  England.  The  Revolutionary  War,  by  interrupting 
trade  with  Europe,  threw  the  American  people  upon  their  own 
resources:  goods  that  had  hitherto  been  imported  had  now  to  be 
manufactured  at  home;  a  large  number  of  new  industries  sprang 
up  rapidly;  and  the  idea  became  prevalent  that  the  new  nation 


ECONOMIC   DEVELOPMENT   OF   THE   UNITED   STATES     73 

must  make  itself  industrially  as  well  as  politically  independent  of 
the  old  world.  The  state  governments  endeavored  to  foster  the 
new  industries  by  protective  tariffs,  and  this  policy  was  later  con- 
tinued, in  a  moderate  form,  by  the  federal  tariff  act  of  July  4, 
1789.  Prizes  were  offered  by  various  societies,  and  even  by  cer- 
tain state  governments,  for  the  introduction  of  the  new  machines 
and  methods  which  were  revolutionizing  industry  in  England. 
Attracted  by  one  of  these  offers,  Samuel  Slater,  "the  father  of 
American  manufactures,"  who  had  been  apprenticed  to  a  manu- 
facturer of  cotton  machinery,  and  was  particularly  familiar  with 
Arkwright's  machines  and  processes,  came  to  this  country  in  1 789, 
and  in  the  following  year  started  the  first  cotton  factory  at  Paw- 
tucket,  Rhode  Island. 

The  factory  system  secured  its  first  real  foothold,  however,  be- 
tween 1806  and  1815,  when  the  Non-Intercourse  Acts,  the  Em- 
bargo, and  the  War  of  1812,  by  suppressing  trade  with  Europe, 
forced  the  American  people  to  do  their  own  manufacturing,  and 
turned  large  amounts  of  capital,  which  had  previously  been  em- 
ployed in  trade  and  shipping,  into  manufactures.  The  growth 
during  this  period  of  isolation  was  extraordinary.  In  1804  only 
four  cotton  mills  were  in  operation.  "In  1807  there  were  fifteen 
cotton  mills  running  8000  spindles  and  producing  300,000  pounds 
of  cotton  yarn  annually.  In  1811  there  were  eighty-seven  mills 
operating  80,000  spindles,  producing  2,880,000  pounds  of  yarn 
per  year  and  employing  4000  men,  women,  and  children.  In  1815 
500,000  spindles  gave  employment  to  76,000  persons,  with  a  pay- 
roll of  $15,000,000  per  year."  l  It  is  hardly  necessary  to  add  that 
when  resumption  of  peace  with  Great  Britain  opened  the  new 
American  industries  to  the  fierce  competition  of  the  older  English 
manufacturers,  increased  protection  was  granted  in  the  tariff  acts 
of  1816,  1824,  and  1828.  A  little  later,  in  the  Middle  Atlantic  and 
New  England  states,  the  period  of  factory  production  had  fully 
arrived.  A  separate  class  of  wage  earners  was  appearing,  who 
were  especially  appealed  to  by  new  arguments  concerning  wages 
in  the  tariff  discussions;  workingmen's  parties  were  organized; 
strikes  and  trades  unions  multiplied,  and  the  latter  were  combined 

1  Coman,  Industrial  History  of  the  United  States,  p.  181. 


74  OUTLINES   OF  ECONOMICS 

into  municipal  and  state  federations;  in  the  thirties  and  forties 
radical  reformers  linked  the  "white  slaves"  of  the  North  with  the 
negro  slaves  of  the  South  and  worked  for  the  abolition  of  both 
"wage  and  chattel  slavery";  the  factory  town  and  the  city  slum 
became  recognized  economic  conditions,  and  the  dangers  of  the 
latter  were  multiplied  by  the  heavy  immigration  after  1845.  By 
the  middle  of  the  nineteenth  century  the  Industrial  Revolution 
was  in  full  sway,  and  the  economic  triumph  of  modern  capitalism 
was  assured. 

As  might  be  supposed,  the  Industrial  Revolution  produced  far 
less  suffering  and  want  in  the  United  States  than  in  England. 
The  evils  attributable  to  the  Industrial  Revolution  in  England 
were  of  two  kinds.  One  arose  from  the  rapidity  and  magnitude 
of  the  industrial  change  itself;  the  other  was  due,  not  to  the  change, 
but  to  the  system  under  which  the  new  industry  was  conducted  — 
the  system  of  capitalistic  industry  working  in  a  regime  of  practi- 
cally unregulated  competition.  In  our  country  the  evils  resulting 
from  transition  alone  were  slight.  Our  manufacturing  industries 
were  scarcely  started  when  the  spinning  jenny,  the  power  loom, 
and  the  steam  engine  were  introduced,  and  so  almost  from  the 
beginning  the  factory  system  seemed  the  natural  one.  Thus,  the 
change  which  in  England  was  a  revolution  was  in  America  an 
evolution,  a  process  of  construction  with  little  destruction.  And 
for  a  time  even  those  evils  inherent  in  the  system  itself  were  miti- 
gated and  disguised  by  the  immense  natural  wealth  of  this  country, 
the  ease  with  which  land  could  be  obtained,  and  the  unusual  mo- 
bility of  our  working  people,  which  permitted  them  to  take  quick 
advantage  of  the  unusual  opportunities  open  to  them. 

But,  as  will  appear  in  the  following  pages,  these  ameliorating 
agencies  served  only  to  check  and  delay,  not  to  destroy,  the  evil 
possibilities  of  the  new  industrial  system.  As  free  land  has  be- 
come less  and  less  abundant,  the  wage  earners  of  the  East  have 
had  forced  upon  them  conditions  of  life  which  have  kept  down, 
although  they  have  not  absolutely  lowered,  their  standard  of  life. 
Extremes  of  wealth  and  alienation  of  social  classes  have  become 
so  great  as  to  arouse  the  apprehension  of  all  thoughtful  men. 
Labor  riots  that  call  for  military  interference  testify  to  the  fact 


ECONOMIC   DEVELOPMENT   OF   THE   UNITED    STATES     75 

that  we  have  not  escaped,  that  in  the  future  we  can  hope  less  and 
less  to  escape,  the  friction  that  accompanies  all  unfraternal  re- 
lations among  men.  We  have  been  greatly  blest  in  that  we  have 
escaped  the  worst  results  so  long. 

The  Development  of  Agriculture.  The  presence  and  power 
of  those  economic  forces  which  softened  the  asperities  of  the  new 
industrial  system  in  America  are  revealed  in  a  particularly  strik- 
ing way  in  the  history  of  American  agriculture.  In  England,  it 
will  be  remembered,  the  changes  in  agriculture  intensified  the 
evils  of  the  industrial  revolution,  led  to  the  consolidation  of  small 
farms  into  large  landed  estates,  and  put  the  actual  business  of 
farming  largely  into  the  hands  of  tenants.  In  the  United  States, 
however,  practically  none  of  these  tendencies  has  shown  itself  —  at 
least,  not  in  an  alarming  form.  There  is  a  constant  migration 
from  the  country  to  the  city,  to  be  sure,  but  this  is  in  no  sense 
due  to  the  consolidation  of  farms.  Thus  between  1870  and  1900 
the  proportion  of  all  breadwinners  (persons  ten  years  of  age  and 
over  gainfully  occupied)  engaged  in  agriculture  fell  from  47.6  to 
35.6  per  cent.  On  the  other  hand,  more  persons  are  still  employed 
in  agriculture  than  in  any  other  branch  of  industry;  and  owing 
to  the  opening  up  of  old  Indian  reservations  for  farm  settlement, 
the  constant  alienation  of  the  public  domain,  and  the  breaking 
up  of  Southern  plantations  and  "bonanza  farms."  the  number  of 
farms  seems  to  have  increased  quite  as  rapidly  as  the  general 

population. 

/ 

The  great  improvement  which  has  taken  place  in  agricultural  methods 
and  machinery  enables  the  relatively  smaller  farm  population  to  satisfy  the 
demand  for  agricultural  produce  even  more  completely  than  in  the  past. 
That  is  to  say,  the  machine  power  introduced  into  farming  has  more  than 
taken  the  place  of  those  persons  and  their  descendants  who  have  abandoned 
agriculture.  It  has  been  estimated,  for  instance,  that  in  1895  it  actually 
required  only  about  120,000,000  days'  work  to  produce  the  nine  principal 
farm  crops  of  that  year,  whereas,  had  they  been  produced  by  the  methods 
and  machinery  of  1850,  at  least  570,000,000  days'  work  would  have  been 
required.1 

1  H.  W.  Quaintance,  "The  Influence  of  Farm  Machinery  on  Production  and 
Labor,"  Publications  of  the  American  Economic  Association,  Third  Series,  Vol  5, 
No.  4,  pp.  27-29. 


76  OUTLINES   OF  ECONOMICS 

Notwithstanding  the  improvement  of  farm  methods  and  ma- 
chinery, the  agricultural  industry  shows  no  real  tendency  to  assume 
a  capitalistic  form.  The  average  farm  of  to-day  is  smaller  than  it 
was  fifty  years  ago,  and  although  it  represents  somewhat  more 
capital,  the  increase  of  the  capital  investment  is  not  great,  is  much 
less,  in  fact,  than  the  increase  in  the  wealth  of  the  average  individ- 
ual. Moreover,  a  majority  of  American  farmers  own  the  farms 
they  cultivate,  and  the  statistics  indicate  that  it  is  still  compara- 
tively easy  for  an  enterprising  farm  laborer  to  rise  to  the  status 
of  tenant  and  from  that  condition  into  the  ranks  of  the  farm  pro- 
prietors.1 

Manufactures.  —  In  agriculture,  as  we  have  seen,  the  passage 
of  time  has  not  brought  about  a  highly  capitalized  form  of  indus- 
try, the  typical  farm  represents  only  a  small  investment  and  is 
tilled  by  its  owner,  there  is  no  sharp  distinction  between  employees, 
unions  of  wage  earners  are  practically  unknown,  and  passage  from 
the  wage  earning  to  the  employing  class  is  still  comparatively 
easy.  In  manufactures,  practically  all  these  conditions  have  been 
reversed  since  the  end  of  the  eighteenth  century.  And  it  is  the  tone 
of  the  manufacturing  industry  rather  than  that  of  agriculture 
which  represents  the  keynote  of  the  modern  economic  movement, 
because  agriculture  is  constantly  decreasing  while  manufacturing 
and  allied  industries  are  constantly  increasing  in  relative  im- 
portance. At  the  beginning  of  the  last  decade  of  the  eighteenth 
century,  seven  eighths  of  the  working  population  were  employed 
in  agriculture,  and  the  manufactured  products  of  the  coun- 
try were  valued  at  $20,000,0x30.  Half  a  century  later,  in  1840, 
77.5  per  cent  of  the  breadwinners  were  employed  in  agriculture, 
16.5  per  cent  in  trades  and  manufactures  alone,  and  the  products 
of  the  manufacturing  industries  were  valued  at  $483,278,215. 
Fifty  years  later,  in  1890,  35.7  per  cent  of  the  workers  were 
in  agriculture,  24.4  per  cent  in  manufacturing  and  mechanical 
pursuits,  and  the  manufactured  products  were  valued  at 

'Tenancy  seems  to  be  increasing  in  the  United  States,  but  the  authorities  differ 
in  their  interpretation  of  the  phenomenon,  some  regarding  it  as  a  favorable  and' 
others  as  an  unfavorable  sign.  This  and  other  questions  touched  upon  in  the 
preceding  paragraphs  are  discussed  at  greater  length  in  a  later  chapter. 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED   STATES     77 

$9,372,437,283.  In  1905,  to  cite  the  latest  figures,  the  value  of 
the  products  had  reached  the  enormous  sum  of  $16,866,706,985. 

The  change  in  the  character  of  the  industry  has  been  even  more 
striking  than  its  growth  and  expansion.  In  the  first  place,  ma- 
chinery and  capital  have  become  increasingly  prominent.  In 
1850,  for  instance,  $556  worth  of  capital  was  invested  for  each 
wage  earner,  while  in  1900  the  average  amount  of  capital  per 
wage  earner  was  SiSso.1  In  the  second  place,  the  organization  of 
the  industry  has  changed,  so  that  the  individual  owner  and  ordi- 
nary partnership  are  rapidly  being  replaced  by  the  corporation. 
At  the  beginning  of  the  nineteenth  century,  corporations,  though 
not  unknown  in  commerce  and  banking,  were  very  uncommon  in 
the  manufacturing  industries.  In  1905,  incorporated  companies 
employed  70.6  per  cent  of  the  wage  earners  and  manufactured 
73.7  per  cent  of  the  goods  produced  in  all  the  manufacturing 
industries. 

This  change  in  organization  has  been  a  powerful  factor  in  de- 
stroying the  personal  relation  between  the  owners  of  capital  and  the 
wage  earners  who  man  their  plants,  and  has  thus  helped  to  widen 
the  growing  breach  between  capital  and  labor.  It  has  also  con- 
tributed greatly  to  the  concentration  of  industrial  control.  Law 
and  custom  in  this  country  have  combined  to  make  the  small 
stockholder  in  the  largest  corporations  a  virtual  nonentity  so  far 
as  practical  participation  in  the  management  of  the  corporation 
is  concerned;  and  the  individual  or  clique  of  "insiders"  who 
own  a  bare  majority  of  the  stock  rule  the  business  despotically. 
Incorporation,  then,  instead  of  introducing  a  greater  measure  of 
real  industrial  cooperation  and  thus  democratizing  industry,  has 
too  frequently  turned  out  to  be  an  ingenious  device  by  which  en- 
ergetic promoters  borrow  or  secure  the  spare  savings  of  the  com- 
munity on  the  most  flexible  terms  and  with  a  minimum  of  respon- 
sibility. The  corporation  thus,  while  it  appeared  to  be  diffusing 
the  ownership  of  industry,  has  in  reality  worked  toward  the  con- 
centration of  industrial  control. 

1  Owing  to  variations  in  the  definition  of  "capital"  and  other  similar  changes, 
the  statistical  comparisons  made  in  this  and  the  preceding  paragraph  are  not  very 
accurate,  and  are  to  be  accepted  as  illustrations  rather  than  measurements. 


78  OUTLINES   OF  ECONOMICS 

Other  forces,  moreover,  have  been  working  toward  industrial 
concentration,  the  most  powerful  of  which,  perhaps,  has  been  ex- 
cessive competition.  For  many  decades  in  this  country  the  unre- 
stricted competition  of  rival  manufacturers  made  them  almost 
Ishmaelites  in  their  business  relations  with  one  another.  Tied 
down  to  their  large  investments  of  fixed  capital,  they  were  com- 
pelled to  stand  and  fight  without  quarter.  In  every  such  war 
the  number  of  combatants  tends  to  decrease.  As  old  rivals  are 
killed  off,  the  successful  acquire  greater  skill  and  greater  power 
in  the  conflict.  With  the  passage  of  time  greater  and  greater 
equipment  is  required  to  give  any  hope  of  a  successful  struggle, 
and  some  of  the  contestants,  learning  prudence  from  the  struggle, 
combine  to  increase  their  fighting  power.  The  inevitable  result, 
whether  through  simple  survival  of  the  fittest  or  through  combi- 
nation, is  a  marked  increase  in  the  sixe  and  importance  of  the  in- 
dustrial unit.  Between  1900  and  1905,  for  instance,  the  number 
of  establishments  in  the  factory  industries  increased  only  4.2  per 
cent,  but  their  capital  increased  41.3  per  cent,  and  the  value  of 
their  products  29.7  per  cent.  In  many  of  our  most  important  in- 
dustries the  number  of  establishments  is  actually  decreasing.  In 
the  manufacture  of  agricultural  implements  between  1880  and 
1905,  to  take  a  single  illustration  of  the  many  that  might  be  cited, 
the  number  of  establishments  decreased  from  1943  to  648,  while 
the  capital  grew  from  $62,109,668  to  $196,740,700,  the  wage  earn- 
ers from  39,580  to  47,394,  and  the  value  of  the  products  from 
$68,640,486  to  $112,007,344.  There  are  industries,  of  course,  in 
which  no  such  consolidation  has  taken  place,  but  they  are  unim- 
portant in  comparison  with  those  in  which  it  has.  The  extent  to 
which  the  giant  industry  and  large-scale  production  have  come 
to  dominate  our  manufacturing  industries  in  the  year  1905  is 
shown  in  the  following  table,  which  will  repay  careful  study.  Es- 
tablishments of  the  largest  size,  i.e.  those  whose  annual  output 
exceeds  $1,000,000,  constitute  less  than  i  per  cent  of  the  number 
of  establishments,  but  manufacture  nearly  40  per  cent  of  all  the 
goods.  Nearly  three  fourths  of  the  wage-earners  are  employed  in 
industries  having  a  capital  of  more  than  $  100,000  each. 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED    STATES     79 


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8o  OUTLINES   OF  ECONOMICS 

Recently  the  movement  toward  large-scale  industry  has  taken 
on  another  phase.  In  addition  to  concentration  or  centralization 
of  industry,  we  are  now  having  a  rapidly  increasing  integration 
of  industry.  Large  business  concerns  are  finding  it  profitable  to 
carry  on  under  one  management  several  closely  related  industries. 
For  illustration,  take  the  case  of  the  United  States  Steel  Corpora- 
tion. Here  we  have  united  under  one  management  the  American 
Bridge  Company,  the  American  Sheet  Steel  Company,  the  Ameri- 
can Steel  Hoop  Company,  the  American  Steel  and  Wire  Company, 
the  American  Tin  Plate  Company,  the  Federal  Steel  Company, 
the  Lake  Superior  Consolidated  Iron  Mines,  the  National  Steel 
Company,  the  National  Tube  Company,  and  the  Carnegie  Steel 
Company.  Of  the  last  itself,  Mr.  Charles  M.  Schwab  says,  in  his 
testimony  before  the  Industrial  Commission  (Vol.  XIII,  p.  448) : 
"The  Carnegie  Company  were  large  miners  of  ore  —  mined  all 
the  ore  that  they  required  themselves,  to  the  extent  of  over 
4,000,000  tons  per  year.  They  transported  a  large  percentage  of 
it  in  their  own  boats  over  the  lakes;  they  carried  a  large  percent- 
age of  it  over  their  own  railroad  to  their  Pittsburg  works,  and 
manufactured  it  there,  by  the  various  processes,  into  a  great  vari- 
ety of  iron  and  steel  articles  —  I  think  perhaps  a  larger  general 
variety  of  steel  articles  than  almost  any  other  manufacturing  con- 
cern." 

Transportation  and  Railways.  — The  industrial  concentration  of 
which  we  have  been  speaking  does  not  necessarily  lessen  competi- 
tion at  all.  It  merely  gives  the  business  into  the  hands  of  increas- 
ingly powerful  rivals  among  whom  competition  may  be  all  the 
more  bitter  because  of  the  size  of  the  contestants.  But  in  the 
principal  transportation  industries  time  has  amply  demonstrated 
that  another  rule  prevails:  competition  has  utterly  failed  to  pro- 
tect the  consumer,  and  the  progress  of  consolidation  has  operated 
to  emphasize  and  strengthen  the  inherently  monopolistic  character 
of  the  industry. 

The  history  of  transportation  in  this  country  since  the  estab- 
lishment of  the  Union  falls  into  three  stages.  The  "turnpike 
period"  extends  from  1790,  the  year  in  which  the  first  turnpike 
was  constructed,  until  1816,  when  steam  navigation  upon  the  Ohio 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED   STATES     8l 

River  became  fairly  regular.  The  second  stage,  the  "river  and 
canal  period,"  ends  with  the  panic  of  1837,  and  is  marked  particu- 
larly by  the  introduction  of  steam  travel  on  the  Hudson  (1807), 
the  Ohio,  and  Mississippi  rivers  (1808  to  1817)  and  the  opening  of 
the  Erie  Canal  in  1826.  The  last  stage,  the  "period  of  the  railway," 
extends  from  about  1840  to  the  present  time.  Of  course,  in  con- 
trasting these  periods,  it  is  not  meant  to  suggest  that  canals  were 
not  built  before  1790,  or  that  turnpikes  are  not  important  at  the 
present  time.  As  a  matter  of  fact,  a  canal  was  built  in  Orange 
County,  New  York,  as  early  as  1750;  and  there  are  few  economic 
needs  of  greater  importance  at  the  present  time  than  the  improve- 
ment of  our  roads.  These  "periods"  merely  indicate  the  kind  of 
transportation  facilities  which  at  different  times  have  been  most 
prominent  in  the  minds  of  the  people. 

In  the  development  of  the  railway,  certain  approximately  defi- 
nite stages  may  also  be  distinguished.  Between  1830  (when  the 
first  railway  —  the  Baltimore  and  Ohio  —  was  opened  for  traffic) 
and  1840,  the  railways  were  short,  local  lines  used  in  large  degree 
to  supplement  or  piece  out  the  rivers  and  canals.  In  the  next 
period,  1840  to  1870,  many  new  roads  were  built,  and  the  process 
of  "linear  consolidation" — the  linking  together  of  local  com- 
panies into  through  trunk  lines  —  began.  By  1869  both  the  New 
York  Central  and  the  Pennsylvania  had  effected  through  connec- 
tions with  Chicago.  In  the  same  year,  the  completion  of  the  Cen- 
tral and  Union  Pacific  railways  linked  the  Pacific  Ocean  with  the 
eastern  railways,  and  the  continent  was  spanned. 

The  period  between  1870  and  1890  is  marked  by  three  striking 
developments.  First,  it  was  a  period  of  feverish  expansion:  the 
railway  mileage  of  the  country  increased  from  52.000  to  160,000 
miles,  more  than  200  per  cent.  Secondly,  the  completion  of  sev- 
eral through  routes  from  the  Atlantic  seaboard  to  Chicago  brought 
about  a  period  of  destructive  competition,  which  led  to  discrimina- 
tion and  rebating  in  through  traffic  and  the  overcharging  of  local 
or  non-competitive  traffic.  "Wherever  competition  appeared, 
discrimination  followed;  and  in  the  scramble  for  business  the 
stronger  shippers  were  favored  at  the  expense  of  the  weaker. 
Where  there  was  no  competition  the  public  felt  that  they  were 


82  OUTLINES   OF  ECONOMICS 

being  oppressed  by  a  monopoly,  to  make  up  for  sacrifice  rates 
elsewhere  —  a  feeling  which  was  intensified  by  the  absentee  own- 
ership of  the  western  roads."  l  Thirdly,  this  condition  of  demor- 
alization led  to  a  double  reaction.  The  railways  sought  to  re- 
strain competition  by  the  creation  of  pools  and  traffic  agreements, 
while  the  people  sought  to  protect  themselves  through  legislation 
and  the  creation  of  railway  commissions.  The  Federal  or  Inter- 
state Commerce  Commission  was  established  in  1887. 

The  last  period,  from  1890  to  the  present  time,  has  been  marked 
by  an  unprecedented  amount  of  consolidation  and  combination 
among  competing  roads,  and  by  a  general  acceptance  of  the 
truth  that  the  railway  industry  is  inherently  monopolistic  and 
must  be  subjected  to  public  control.  Thus,  at  the  same  time  that 
the  control  of  the  magnificent  railway  system  of  this  country  — 
greater  in  extent  than  all  the  railways  of  Europe  combined  —  has 
fallen  into  the  hands  of  seven  or  eight  groups  of  men  or  "inter- 
ests," dominated  by  a  number  of  men  small  enough,  some  one  has 
said,  to  sit  about  the  same  table,  the  people  themselves  have  per- 
fected administrative  machinery  strong  enough,  it  is  hoped,  to 
hold  the  great  monopoly  in  check.  Complete  monopoly  and  effect- 
ive public  control  are  being  perfected  at  the  same  time,  and 
with  this  dual  consummation  there  closes  a  great  epoch  in  eco- 
nomic thought  and  public  policy.  The  new  Interstate  Commerce 
Act  of  1906  is  a  public  recognition  of  the  fact  that  the  old  prob- 
lem of  private  competition  versus  public  regulation  has  given  way 
to  the  new  problem  of  public  regulation  versus  public  ownership. 

It  would  be  almost  impossible  to  exaggerate  the  part  which  transportation 
agencies,  and  particularly  the  railways,  have  played  in  the  economic  develop- 
ment of  this  country.  Ours  is  a  country  of  "magnificent  distances,"  and 
because  of  this  fact,  it  was  particularly  necessary  that  superior  means  of 
communication  and  transportation  should  be  early  introduced,  if  the  country 
was  to  be  held  together.  After  the  Revolutionary  War  there  was  real  danger 
that  the  settlers  west  of  the  Alleghanies  would  be  completely  alienated. 
Washington  was  quick  to  realize  this  fact.  "The  Western  settlers,"  he  wrote 
to  the  governor  of  Virginia,  shortly  after  the  Revolutionary  War,  "  stand  as  it 
were  upon  a  pivot.  The  touch  of  a  feather  would  turn  them  any  way.  They 
have  looked  down  the  Mississippi  until  the  Spaniards,  very  impoliticly,  I 

1  H.  C.  Emery  in  The  Cambridge  Modern  History,  Vol.  7,  p.  706. 


ECONOMIC  DEVELOPMENT  OF  THE   UNITED   STATES     83 

think,  for  themselves,  threw  difficulties  in  their  way ;  and  they  looked  that 
way  for  no  other  reason  than  because  they  could  glide  gently  down  the 
stream,  without  considering,  perhaps,  the  difficulties  of  the  voyage  back  again, 
and  the  time  necessary  to  perform  it  in ;  and  because  they  have  no  other  means 
of  coming  to  us  but  by  long  land  transportations  and  unimproved  roads." 

This  danger  was  averted  by  the  building  of  the  Cumberland  Road,  the 
introduction  of  steam  navigation  on  the  Ohio,  and  the  completion  of  the  Erie 
Canal.  Later  it  looked  as  if  the  use  of  the  Mississippi  and  other  natural 
avenues  of  communication  would  link  the  Middle  West  more  closely  to  the 
South  than  the  northeastern  states,  thus  giving  the  South  a  preponderant 
influence  in  the  inevitable  struggle  over  slavery.  This  problem,  however, 
was  solved  by  the  railways,  which,  unlike  the  rivers,  ran  east  and  west  rather 
than  north  and  south.  The  railway  was  thus  a  strong  factor  in  the  preser- 
vation of  the  Union.  And  since  the  Civil  War,  Western  settlement  has  fol- 
lowed the  railroad.  It  has  been  the  great  pioneering  agency  of  the  last  half 
century,  and  is  entitled  to  as  much  credit  as  the  public  land  policy  for  the 
rapid  settlement  of  the  West. 

In  the  development  of  our  transportation  facilities,  however,  the  State  has 
been  from  the  very  first  an  active  partner  of  private  enterprise.  Not  only 
has  the  State  built  roads,  canals,  and  railways  of  its  own,  but  it  subsidized 
the  private  companies  which  engaged  in  similar  enterprises,  with  prodigal 
liberality.  Of  the  total  state  debts  —  $170,806,187  in  all — contracted  prior 
to  1838,  $60,201,551  were  chargeable  to  canals,  $42,871,084  to  railways, 
$52,640,000  to  banks,  $6,618,868  to  roads,  and  $8,474,684  to  miscella- 
neous objects.  After  the  panic  of  1837  there  was  little  direct  construction 
by  the  State  of  internal  improvements,  but  national,  state,  and  local  govern- 
ments vied  with  one  another  in  assisting  private  companies  by  exemptions 
from  taxation  and  by  grants  of  land,  money,  and  credit.  How  much  these 
subsidies  amounted  to  we  do  not  know,  but  the  aggregate  must  have  been 
enormous,  as  appears  from  the  statistics  of  land  grants.  "  During  the  twenty- 
one  years  between  1850  and  1871,  at  which  time  land  grants  were  discontin- 
ued, more  than  159,000,000  acres  were  placed  at  the  disposal  of  railroad 
corporations  by  the  federal  government  and  55,000,000  by  the  state  govern- 
ments." *  In  their  origin  and  genesis,  therefore,  as  well  as  in  their  essential 
nature,  the  railways  are  quasi-public  institutions. 

The  Labor  Movement.  —  In  the  preceding  pages  we  have  seen 
how  capitalistic  industry  under  a  regime  of  free  competition  passed 
from  an  earlier  period  of  cut-throat  rivalry  to  a  later  period  of  com- 
bination amounting  in  many  cases  to  monopoly.  A  similar  phe- 
nomenon is  discernible  in  the  labor  movement.  At  the  beginning 
of  the  nineteenth  century  there  were  probably  less  than  a  dozen 

1  Cf.  Bogart,  Economic  History  of  the  United  States,  pp.  195,  308,  passim. 


84  OUTLINES   OF  ECONOMICS 

trades  unions  in  the  United  States,  and  we  actually  know  of  the 
existence  of  only  one.  Between  1825  and  the  panic  of  1837,  how- 
ever, they  multiplied  rapidly,  and  efforts  were  made  to  unite  the 
scattered  "locals"  of  separate  trades  into  broader  national  unions, 
and  to  confederate  the  unions  of  different  trades  into  municipal 
and  district  federations.  These  efforts  were  only  partially  suc- 
cessful, however,  and  it  was  not  until  after  1850  that  permanent 
national  unions  were  established,  and  not  till  the  organization 
of  the  Knights  of  Labor  in  1869  that  a  fairly  permanent  national 
federation  was  created.  The  Knights  of  Labor  reached  the  zenith 
of  its  power  about  1886,  and  since  the  panic  of  1893  its  place  has 
been  gradually  taken  by  the  American  Federation  of  Labor,  with 
which  most  American  unions,  except  the  Railway  Brotherhoods 
and  the  socialistic  unions  west  of  the  Mississippi  River,  are  affili- 
ated. In  1893  tne  membership  of  the  American  Federation  of 
Labor  numbered  about  250,000.  By  1906  it  had  grown  to  ap- 
proximately 1,444,200.  These  figures  give  some  idea  of  the  strik- 
ingly rapid  growth  of  trades  unionism  in  the  last  fifteen  years.  As 
the  membership  of  the  American  Federation  of  Labor  is  usually 
understated,  and  as  there  are  probably  from  500,000  to  700,000 
members  in  organizations  not  affiliated  with  the  American  Fed- 
eration, we  conclude  that  the  aggregate  membership  of  American 
labor  organizations  at  the  close  of  the  year  1906  amounted  to 
about  2,300,000  persons,  mostly  men. 

There  are  thus  at  least  five  periods  distinguishable  in  the  history 
of  American  trades  unionism:  the  germinal  period,  1789-1825;  the 
revolutionary  period,  1825-1850,  so  called  because  of  the  close  con- 
nection in  this  period  between  trades  unionism  and  more  radical 
reforms  such  as  socialism  and  cooperation;  the  period  of  nation- 
alization, 1850-1865;  the  period  of  federation,  1865-1893;  and 
the  period  of  collective  bargaining,  1893  to  the  present  time.  We 
speak  of  the  present  epoch  as  the  period  of  collective  bargaining 
because  it  is  only  in  recent  years  that  employers  and  the  general 
public  have  recognized  that  the  trades  union  is  here  to  stay,  and 
must  be  regarded  as  an  irrepressible,  permanent  institution  with 
which  many  employers  of  labor  must  bargain,  whether  they  like  it 
or  not. 


ECONOMIC  DEVELOPMENT  OF  THE   UNITED   STATES     85 

The  avowed  aim  of  the  trades  union  is  a  complete  combination 
of  all  the  workers  in  a  given  occupation  or  industry.  The  Broth- 
erhood of  Locomotive  Engineers,  for  instance,  probably  counts 
among  its  members  more  than  90  per  cent  of  all  the  locomotive 
engineers  in  North  America,  although  there  are  few  trades 
which  are  so  completely  organized  as  this.  With  the  passage  of 
time,  moreover,  the  trades  unions  have  made  increasing  use  of 
the  monopolistic  principle  of  the  closed  shop  —  the  principle  which 
leads  union  men  to  refuse  to  work  with  nonunion  men,  and  which 
finds  expression  in  the  trades-unionist's  new  commandment:  "  Thou 
shall  not  take  thy  neighbor's  job."  Very  recently  several  authori- 
tative court  decisions  have  held  that  labor  combinations,  particu- 
larly national  or  international  combinations,  are  contracts  or 
agreements  in  restraint  of  trade,  and  as  such  are  illegal  under  the 
federal  or  state  anti-trust  acts.  This  is  but  official  recognition  of 
the  fact  that  the  forces  which  have  led  to  the  rapid  development  of 
trades  unionism  since  the  Industrial  Revolution  are  the  same  forces 
which  explain  industrial  combination  and  consolidation.  The 
anti-trust  acts  need  amendment:  not  all  combinations  in  restraint 
of  trade,  but  only  unreasonable  combinations,  should  be  prohibited. 

The  development  of  powerful  combinations  in  the  labor  world 
has  engendered  a  counter  movement  among  the  employers,  which 
expresses  itself  concretely  in  the  modern  employers'  association. 
Such  organizations  are  not  new;  we  have  record  of  such  an  associa- 
tion among  the  master  shoemakers  of  Philadelphia  in  1789.  But 
in  recent  years  these  associations  have  become  permanent,  formal, 
and  aggressive.  They  fight  the  labor  organizations  with  their 
own  weapons,  matching  the  lockout  against  the  strike,  the  black 
list  against  the  boycott,  and  the  "labor  bureau"  against  the  "un- 
fair list"  with  which  the  reader  of  trades-union  journals  is  familiar. 
Most  of  the  employers'  associations,  like  most  of  the  trades  unions, 
have  associated  themselves  for  common  action  in  a  large  national 
federation,  the  Citizens'  Industrial  Association  of  America,  with 
which,  in  December,  1903,  there  were  affiliated  sixty  national  em- 
ployers' associations,  sixty-six  state  and  district  associations,  and 
three  hundred  and  thirty-five  local  or  municipal  associations  of 
employers. 


86  OUTLINES   OF  ECONOMICS 

The  bitter  conflict  between  organized  labor  and  organized  capi- 
tal has  forced  the  State,  in  the  interest  of  industrial  peace,  to 
inaugurate  "Wage  Boards"  and  Boards  of  Arbitration  and  Concili- 
ation. Some  of  these,  such  as  the  New  Zealand  Court  of  Arbitra- 
tion, are  empowered  to  enforce  their  awards  upon  employers  and 
employees;  while  others,  like  the  Canadian  and  some  of  the 
American  State  Boards  of  Arbitration,  have  no  power  to  settle 
disputes  authoritatively,  although  they  may  make  "compulsory 
investigations"  and  publish  their  finding  as  to  the  equities  of  the 
case.  These  and  similar  topics,  however,  are  reserved  for  more 
detailed  discussion  in  a  later  chapter. 

State  Regulation  of  Industry.  —  The  growing  interference  of 
the  State  in  the  conflict  between  capital  and  labor  brings  us  natu- 
rally to  the  general  subject  of  the  State  in  relation  to  industry. 
When  the  American  colonies  were  planted,  mercantilism  was  the 
dominant  political  philosophy ;  but,  as  we  have  seen,  mercantil- 
ism gave  way  to  a  philosophy  of  individualism  in  the  eighteenth 
century,  under  the  combined  influence  of  the  reaction  against  the 
English  Navigation  Acts,  the  natural  antipathy  of  a  frontier  com- 
munity to  legal  restraint,  the  philosophy  of  Locke,  and  in  a  minor 
degree  the  teachings  of  the  French  physiocrats.  The  triumph  of 
individualism,  as  a  philosophical  system,  came  at  the  critical  pe- 
riod when  our  State  and  federal  constitutions  were  in  the  making, 
and  it  thus  became  intrenched  in  the  organic  law  of  the  nation, 
giving  constitutional  sanction  to  the  doctrine  of  laissez-faire,  and 
establishing  a  constitutional  guarantee  of  freedom  oj  contract,  in  ac- 
cordance with  which  adult  men  were  left  "free"  to  work  as  long 
as  they  "pleased"  (or  were  compelled),  for  whatever  wages  they 
were  "pleased"  (or  forced)  to  accept.  Under  the  influence  of 
these  doctrines,  for  instance,  our  courts  have  annulled  such  whole- 
some regulations  as  laws  prohibiting  payment  of  wages  in  store 
orders,  and  statutes  limiting  the  hours  of  labor  of  men  in  bake- 
shops,  or  other  exhausting  occupations.  Decades  of  experience 
have  amply  proved  that  the  average  wage  earner  is  too  weak  to 
protect  himself  against  many  evils;  but  our  constitutional  law 
has  made  it  exceedingly  difficult  for  the  State  to  protect  him.  For- 
tunately, however,  the  American  people  have  a  fashion  of  bend- 


ECONOMIC   DEVELOPMENT   OF  THE   UNITED   STATES     87 

ing  their  constitutional  law  to  fit  the  facts,  not  blinding  them- 
selves to  the  facts  by  worshiping  the  law;  and  in  recent  years 
the  Supreme  Court  of  the  United  States  has  progressed  so  far  as 
to  sanction  a  state  law  restricting  the  hours  of  labor  of  men  in 
underground  mines  and  smelters,  although  many  of  the  state 
Supreme  Courts  are  far  less  enlightened. 

It  is  impossible  to  show  in  detail  how  the  free  trade  and  indi- 
vidualistic tendencies  of  the  Revolutionary  period  gave  way  to  a 
constantly  growing  programme  of  State  interference.  The  doctrine 
of  laissez-faire  was  never  adapted  in  its  entirety,  and  year  by 
year  we  have  moved  farther  and  farther  away  from  it.  State  in- 
terference began  with  the  adoption  of  a  tariff  act  in  1789,  "for 
the  support  of  the  government,  for  the  discharge  of  the  debts  of 
the  United  States,  and  tlie  encouragement  and  protection  of  manu- 
factures"; reached  almost  a  maximum  in  the  Embargo  Act  of 
1807;  showed  itself  in  the  policy  of  internal  improvements  and 
State  aid  to  turnpike,  canal,  and  railroad  companies;  brought  us 
the  great  mass  of  labor  and  factory  legislation  which  has  been 
adopted  by  so  many  states  since  the  Civil  War;  led  in  turn  to  the 
Interstate  Commerce  Act  of  1887  and  the  Sherman  Anti-Trust  Act 
of  1890;  and  finally  culminated  in  the  new  Interstate  Commerce 
Act,  the  National  Meat  Inspection  Law,  and  the  National  Pure 
Food  Law.  Excessive  competition  among  laborers,  which  forced 
them  to  accept  work  under  conditions  destructive  of  physique  and 
morals,  has  led  to  the  factory  acts,  prohibition  of  child  labor,  and 
limitation  of  the  hours  of  labor  of  women;  excessive  competition 
leading  to  the  adulteration  of  products  and  their  manufacture 
under  insanitary  conditions  has  given  us  the  Meat  Inspection  and 
Pure  Food  laws;  excessive  competition  among  corporations,  lead- 
ing to  combination  and  oppressive  monopoly,  has  brought  us  the 
anti-trust  acts  and  regulation  through  state  and  national  commis- 
sions. Whether  the  individualistic  character  of  industrial  society 
endures  or  disappears,  individualists  and  socialists  alike  are  now 
agreed  that  the  State  must  interfere.  As  a  prominent  English 
statesman  expressed  it,  "We  are  all  socialists  now,"  although  he 
merely  meant  by  this  statement  that  the  passive  theory  of  govern- 
ment has  been  wholly  discredited. 


88  OUTLINES   OF  ECONOMICS 

Up  to  the  present  time  State  interference  has  had  as  its  princi- 
pal object  the  improvement  and  preservation  of  competition.  The 
conscientious  manufacturer  who  would  not  poison  consumers  for 
the  sake  of  swelling  his  profits,  the  high-minded  employer  who 
would  not  "sweat"  women  and  children  merely  to  reduce  the  cost 
of  production,  the  delicately  scrupulous  shipper  who  would  not 
undermine  a  rival  by  forcing  a  common  carrier  to  pay  him  rebates, 
—  all  these  have  suffered  as  much  from  the  abuses  of  competition 
as  the  general  public  itself.  Industry  under  the  competitive  regime 
is  a  rough  game  played  for  high  stakes,  and  if  it  is  to  be  played 
fairly,  there  must  be  intelligent  rules  of  the  game  and  an  umpire 
powerful  enough  to  enforce  them  upon  all  contestants  alike.  If 
the  manufacturers  of  Massachusetts  are  prohibited  from  employ- 
ing children  under  fourteen  years  of  age  while  those  of  South  Caro- 
lina are  encouraged  to  do  so,  decency  is  penalized,  and  the  vic- 
tory goes  to  the  contestant  guilty  of  the  greatest  number  of  fouls. 

State  interference,  as  we  have  said,  has  had  as  its  principal 
object  the  maintenance  of  competition  upon  a  higher  and  more 
wholesome  basis.  But  this  has  not  been  its  sole  object.  Our  re- 
cent regulation  of  public  utility  companies  aims  not  to  bolster  up 
or  preserve  competition  among  such  companies,  but  to  introduce 
a  substitute  for  competition;  and  the  strong  movement  now  on 
foot  to  modify  the  Federal  Anti-Trust  Act  is  partially  based  upon 
a  recognition  of  the  possibility  that  perhaps  regulated  monopoly 
may  prove  on  the  whole  more  beneficial  than  regulated  competi- 
tion. Upon  this  point  we  pass  no  judgment;  time  alone  can  tell. 
Whether  it  is  desirable,  whether  in  the  long  run  it  will  be  possible, 
to  check  the  monopolistic  tendency  of  the  age  and  thus  maintain 
a  competitive  as  distinguished  from  a  socialistic  regime  of  indus- 
trial society,  may  be  said  to  be  the  supreme  economic  problem  of 
the  twentieth  century. 

QUESTIONS 

1.  How  do  you  account  for  the  failure  of  the  early  colonial  restrictive 
legislation  ? 

2.  What  was  the  effect  of  English  colonial  policy  and  the  Navigation  Acts 
upon  American  manufactures?    shipbuilding?    American  political  philoso- 
phy? 


ECONOMIC   DEVELOPMENT   OF   THE   UNITED    STATES     89 

3.  What  was  the  condition  of  American  agriculture  in   1776?  of  manu- 
factures? shipbuilding?  transportation? 

4.  Was  the  Industrial  Revolution  as  important  in  this  country  as  in  Eng- 
land?    Was  it  attended  with  as  much  suffering?     Why? 

5.  What  part  has  been  played  by  war  in  the  tariff  and  industrial  history 
of  the  United  States  ? 

6.  In  what  respects  has  the  agricultural  development  of  this  country 
differed  from  that  of  England  ?•  from  that  of  the  manufacturing  industry  ? 

7.  What  changes  have  taken  place  in  the  organization  of  manufacturing 
industries  in  the  last  century? 

8.  What  are  the  principal  causes  and  effects  of  industrial  concentration? 

9.  What  is  the  difference  between  industrial  concentration  and  integra- 
tion? between  large-scale  production  and  monopoly? 

10.  W7hat  stages  are  distinguishable  in  the  history  of  transportation  and 
railways  in  this  country? 

11.  What  part  did  the  State  play  in  the  development  of  railways?     Is 
railway  consolidation  a  recent  phenomenon? 

12.  What  movement  has  the  development  of  trades  unionism  elicited  from 
employers?  from  the  State? 

13.  How  did  the  doctrine  of  non-interference  secure  such  a  strong  foothold 
in  American  constitutional  law?    What  has  been  the  principal  object  of 
State  interference  up  to  the  present  time  ? 

REFERENCES 
(See  also  References  for  Chapter  V) 

BISHOP,  J.  L.     History  of  American  Manufactures. 

BRYN,  E.  W.     Progress  of  Invention  in  the  Nineteenth  Century. 

Census   Reports.     Tenth    Census,    Agriculture,   p.   131.     Twelfth    Census, 

Manufactures,  Part  I,  Chap.  II,  §§  I-VI,  XVII,  XXXIX. 
DEVVEY,  D.  R.     Financial  History  of  the  United  States. 
HADLEY,  A.  T.     Railroad  Transportation,  its  History  and  its  Laws. 
JOHNSON,    E.    R.      American    Railroad    Transportation,  and    Ocean    and 

Inland  Water  Transportation. 

RABBENO,  UGO.     The  A  merican  Commercial  Policy. 
SCMNER,  W.  G.     History  of  Banking  in  the  United  States. 
TAUSSIG,  F.  W.     Tariff  History  of  the  United  States. 
WEBER,  A.  F.     The  Growth  of  Cities  in  the  Nineteenth  Century.     Columbia 

Studies  in  History,  Economics,  and  Public  Law,  Vol.  II. 
WELLS,  D.  A.     Recent  Economic  Changes. 


BOOK    II 


PRINCIPLES   AND    PROBLEMS 


PART   I 

INTRODUCTION 

CHAPTER  VII 

ELEMENTARY  CONCEPTS 

IN  political  economy  many  of  the  technical  terms  employed  are 
often  misunderstood  because  the  same  words  a.re  used  in  ordi- 
nary speech  with  inconsistency  and  confusion.  We  have  often  to 
choose  between  the  alternatives  of  being  inconsistent  and  of  vio- 
lating current  usage.  The  present  chapter  is  devoted  to  a  defi- 
nition of  some  of  the  fundamental  notions  in  political  economy. 

The  statement  is  sometimes  made  that  economics  is  a  mere 
bread-and-butter  science,  and  this  charge  is  not  without  some 
foundation,  since  the  science  studies  men  in  their  endeavor  to 
make  a  living,  but  it  would  be  an  error  to  suppose  that  we  are 
concerned  with  only  the  sordid  aspects  of  human  nature.  This 
is  apparent  if  we  enumerate  the  motives  which  impel  men  to 
acquire  wealth. 

Motives  in  Economic  Activity.  —  (i)  There  is,  in  the  first 
place,  the  endeavor  to  satisfy  one's  strictly  personal  wants,  giving 
rise  to  the  struggle  for  food,  shelter,  comforts,  amusement,  etc. 
These  things  are  wanted  for  their  own  sake,  because  of  the  pleas- 
urable effect  which  they  produce  upon  the  individual  acquiring 
them.  We  have  here,  in  short,  the  motive  of  self-maintenance 
and  development.  (2)  But  every  normal  individual  feels  such  a 
degree  of  affection  for  certain  other  people  that  he  is  also  anxious 
for  their  maintenance  and  development.  Striving  for  the  wel- 
fare of  others  is  a  second  motive  which  impels  men  to  labor  for 
the  acquisition  of  material  things,  and  in  many  cases  is  more  effec- 
tive as  a  spur  to  endeavor  than  the  first.  A  man  will  hold  him- 
self to  the  daily  grind  more  persistently  when  he  feels  some  one 

93 


94  OUTLINES   OF   ECONOMICS 

is  dependent  upon  him  than  when  he  is  standing  alone.  (3)  A 
third  motive  is  the  desire  to  gain  the  esteem  of  one's  fellows. 
This  motive  may  take  the  form  of  an  endeavor  to  do  one's  part 
and  to  be  deserving  of  the  companionship  of  the  class  of  people 
whom  we  admire.  But  much  of  our  wealth  acquisition  is  motived 
by  the  hope  of  impressing  our  fellows  with  a  sense  of  our  own 
importance,  to  show  that  we  are  successful,  admirable,  enviable. 
When  the  income  permits,  old  coats  are  discarded,  not  because 
they  cease  to  give  protection,  nor  because  they  have  become  aes- 
thetically objectionable,  but  because  the  wearers  wish  to  make  a 
favorable  impression  upon  other  people.  Half  the  pleasure  of 
owning  fine  houses  comes  from  the  fact  that  most  people  do  not 
have  them.  This  motive  is  not  always  a  conscious  one,  since 
our  standards  of  beauty  or  propriety  may  themselves  have  been 
the  result  in  part  of  this  desire  for  distinction.  Now  that  bi- 
cycles are  within  the  means  of  workingmen,  it  is  no  longer  fash- 
ionable to  ride  these  machines. 

Somewhat  similar  to  the  desire  for  distinction  is  (4)  the  desire 
for  power.  Men  like  to  dominate  and  command  their  fellows, 
and  this  want  may  be  satisfied  by  means  of  the  dollar  as  well  as 
with  the  sword;  hence  our  Napoleons  of  Finance,  Captains  of 
Industry,  and  Railway  Kings. 

(5)  Again,  the  desire  for  activity  for  its  own  sake  may  be  men- 
tioned. Enforced  idleness  is  as  painful  as  prolonged  labor,  ex- 
cept to  the  degenerate.  This  desire  may  result  in  the  production 
of  goods,  but  more  commonly  it  requires  the  use  of  goods  that 
have  been  produced,  as,  for  example,  the  implements  of  athletic 
exercise.  Finally,  (6)  religion  or  the  ethical  impulse  may  be  an 
important  factor  in  controlling  the  economic  activity  of  the  indi- 
vidual. Observe,  for  instance,  the  difference  in  the  history  of 
communistic  experiments  in  which  religious  feeling  has  been 
strong  and  those  in  which  it  has  been  weak. 

In  this  discussion  the  use  of  the  word  "motive"  must  not  be 
taken  to  mean  that  all  of  the  economic  life  of  the  individual  is  a 
consciously  rational  one,  in  which  pleasures  are  balanced  against 
pains  in  such  a  way  as  to  secure  the  maximum  surplus  of  satis- 
factions. Man  is,  it  is  true,  a  rational  being,  and  as  such  pursues 


ELEMENTARY   CONCEPTS  95 

definite  lines  of  action  under  the  influence  of  conscious  motives; 
but  he  is  also  a  creature  of  instincts  and  habits,  and  much  of  the 
economic  activity  of  the  individual  has  to  be  interpreted  as  the 
working  out  of  instinct  and  habit.  We  speak,  for  example,  of 
such  things  as  the  "instinct  of  workmanship,"  the  "habit  of  in- 
dustry," the  "habit  of  saving,"  and  the  like.  The  foregoing 
analysis  of  the  motives  in  economic  activity  is,  however,  broad 
enough  if  we  remember  that  "pleasure"  is  something  that  is  not 
always  consciously  sought,  but  is  often  to  be  understood  as  the 
result  of  the  functioning  of  inherited  instincts  and  acquired 
habits. 

Utility.  —  As  a  result  of  these  motives,  human  beings  are  striv- 
ing for  the  possession  of  certain  things.  These  we  call  goods  or 
utilities.  To  understand  the  meaning  of  the  term  "utility"  in 
economks,  we  must  recall  the  central  fact  of  our  science,  that  eco- 
nomics is  a  science  of  man.  Goods  may  be  of  interest  to  chemistry 
and  physics  merely  as  things,  but  they  have  no  significance  what- 
ever in  economics  until  they  come  into  relation  with  man.  That 
fact  in  man  which  reflects  upon  things  a  new  character  and  makes 
them  goods  is  the  fact  of  human  wants.  Anything  that  is  capable 
of  satisfying  a  human  want  is  a  good  or  a  utility. 

We  need  here  to  guard  against  a  misunderstanding  which  the 
word  "utility"  sometimes  suggests.  There  is  a  tendency  to  con- 
found it  with  the  idea  of  benefit,  and  to  suppose  that  articles  are 
useful  just  in  proportion  as  they  are  beneficial.  But  in  economics 
these  two  ideas  cannot  be  taken  as  identical.  Utility  is  the  power 
to  satisfy  wants,  not  the  power  to  confer  benefits.  Cigars  are  as 
useful  in  the  economic  sense  as  bread  or  books,  for  all  three  sat- 
isfy wants.  Economic  wants  may  be  serious,  frivolous,  or  even 
positively  pernicious,  but  the  objects  of  these  wants  are  all  alike 
"utilities"  in  the  economic  sense. 

Free  and  Economic  Goods.  —  But  it  is  apparent  that  the  wants 
we  have  mentioned  are  very  unlike  in  character.  Air  and  water, 
for  instance,  we  seldom  think  of  as  things  we  want  at  all.  We 
usually  have  them  in  abundance  and  without  exertion,  so  that, 
though  they  satisfy  wants  as  vital  as  any  we  know,  we  seldom 
spend  any  time  thinking  about  them  or  our  dependence  upon  them 


96  OUTLINES   OF  ECONOMICS 

These  are  free  goods,  that  is,  goods  that  exist  in  quantities  suffi- 
cient to  supply  all  wants  for  them.  Land  in  a  new  country  is 
frequently  a  free  good.  But  the  list  of  things  that  are  free  is 
quickly  exhausted.  On  the  other  hand,  goods  that  are  the  ob- 
jects of  exchange  are  called  economic.  Economic  goods  are  those 
which  exist  in  quantities  less  than  sufficient  to  satisfy  all  wants 
for  them.  Hence,  we  must  economize  in  the  use  of  them,  are 
willing  to  undergo  sacrifice  to  obtain  them,  and  usually  they  are 
obtained  only  by  exertion.  It  is,  however,  their  scarcity  and 
not  the  fact  that  they  have  cost  labor  that  makes  them  economic 
goods.  Land,  for  example,  a  free  gift  of  nature,  is  one  of  our 
most  important  categories  of  economic  goods  at  the  present  time. 

Effort.  —  Fortunately,  the  supply  of  economic  goods  can,  in 
most  cases,  be  increased  by  human  exertion  applied  to  the  ma- 
terials of  nature;  but  this  exertion,  if  carried  beyond  ft  certain 
point,  is  irksome  and  has  an  important  effect  upon  our  economic 
life.  If  the  labor  force  of  the  community  were  unlimited,  a 
great  many  of  the  goods  which  we  now  use  sparingly  would  be 
as  free  as  air.  Idealists  have  pictured  for  us  a  condition  of  the 
future  where  a  few  hours'  work  per  day  for  each  individual  (an 
enjoyable  means  of  working  off  surplus  energy)  will  be  sufficient 
to  supply  us  with  all  of  the  goods  that  we  have  time  to  consume. 
At  present,  however,  most  of  us  find  that  our  consumption  is 
limited  by  the  pain  of  additional  effort.  The  end  of  our  eco- 
nomic activity  is,  therefore,  not  only  to  get  the  greatest  amount 
of  satisfaction,  but  also  to  minimize  the  amount  of  painful  labor. 

Waiting.  —  Another  fact  that  persists  in  our  economic  life  is 
the  necessity  for  waiting.  The  people  of  the  United  States  wish 
to  have  the  Panama  Canal,  but  they  cannot  get  it  without  years 
of  waiting.  They  must  spend  millions  of  days  of  labor  with  no 
benefit  in  return  for  a  long  time  to  come.  This  waiting  has 
often  been  called  abstinence;  but  that  suggests  that  the  waiting 
is  always  painful,  which  is  not  true,  as  we  shall  see  later  in  dis- 
cussing the  subject  of  interest. 

Services.  —  Goods  have  been  commonly  divided  into  (i)  ma- 
terial things,  such  as  food,  clothes,  and  books,  and  (2)  personal 
services,  such  as  the  advice  of  a  physician  or  lawyer. 


ELEMENTARY  CONCEPTS 


97 


The  advisability  of  the  distinction  has  been  denied,  Actors  and  singers, 
it  has  been  urged,  sell  us  perishable  material  things,  i.e.  light  and  sound 
waves  of  a  peculiar  kind.  A  recent  writer  also  considers  the  distinction  con- 
fusing because  it  obscures  the  fact  that  material  things  give  off  services  just 
as  human  beings  do.  The  piano  yields  services  as  does  the  singer.  From 
this  point  of  view  persons  are  durable  economic  goods  along  with  cattle  and 
wheelbarrows.  But,  on  whatever  ground  the  distinction  is  made,  it  is  im- 
portant to  recognize  that  among  the  things  that  contribute  to  our  well-being 
are  some  —  personal  services  —  that  are  so  perishable  that  they  must  be 
used  with  the  direct  cooperation  of  some  other  human  being,  while  in  other 
cases  the  services  are,  as  it  were,  stored  up  in  some  inanimate  material  things, 
and  the  relation  between  the  producer  and  consumer  becomes  an  impersonal 
one.  The  service  of  a  musician,  for  example,  is  personal  and  must  be  used 
the  moment  it  is  rendered ;  the  purchase  of  a  musical  instrument,  on  the  other 
hand,  means  the  purchase  in  a  lump  of  a  long  series  of  uses. 

Personal  Qualities  as  Goods.  — The  central  point  in  our  science 
is  the  conception  of  man  in  his  relations  to  his  environment,  and 
hence  it  does  not  seem  reasonable  to  include  the  personal  quali- 
ties of  men  under  the  head  of  goods.  Good  health  and  techni- 
cal skill  make  a  man's  services  more  valuable  and  assist  him  in 
the  acquisition  of  wealth,  but  they  are  a  part  of  him  rather  than 
of  his  possessions.  It  is  his  services  that  he  sells,  and  it  is  these 
that  we  have  placed  under  the  head  of  goods.  When  we  con- 
sider the  importance  of  the  priceless  heritage  which  the  present 
generation  has  received  in  the  shape  of  knowledge  and  skill,  we 
might  make  these  a  separate  category  as  immaterial  goods. 

On  this  point  Professor  Marshall  says :  "  German  economists  often  lay 
stress  on  the  non-material  elements  of  national  wealth ;  and  it  is  right  to  do 
this  in  some  problems  relating  to  national  wealth,  but  not  in  all.  Scientific 
knowledge,  indeed,  wherever  discovered,  soon  becomes  the  property  of  the 
whole  civilized  world,  and  may  be  considered  as  cosmopolitan  rather  than  a 
specially  national  wealth.  The  same  is  true  of  mechanical  inventions  and 
of  many  other  improvements  in  the  arts  of  production ;  and  it  is  true  of  music. 
But  those  kinds  of  literature  which  lose  their  force  by  translation  may  be 
regarded  as  in  a  special  sense  the  wealth  of  those  nations  in  whose  language 
they  are  written.  And  the  organization  of  a  free  and  well-ordered  State  is  to 
be  regarded  for  some  purposes  as  an  important  element  of  national  wealth." 

But  knowledge  does  not  exist  in  a  disembodied  state,  and  we 
shall  omit  nothing  and  avoid  some  confusion  if  we  divide  all 
goods  into  material  things  and  personal  sendees. 


98  OUTLINES   OF  ECONOMICS 

Wealth.  —  Political  economists  have  frequently  called  economic 
goods  wealth,  thus  excluding  free  goods.  Some  writers,  however, 
include  free  goods  in  the  idea  of  wealth.  The  truth  is,  that  this 
term  cannot  be  defined  satisfactorily  unless  we  specify  whether 
we  are  speaking  from  the  individual  point  of  view  or  from  the 
social  point  of  view.  From  the  individual  standpoint,  wealth 
means  valuable  claims  to  goods;  from  the  social  point  of  view, 
we  shall  regard  wealth  as  an  aggregate  or  stock  of  goods.  This 
excludes  personal  services  from  the  category  of  wealth,  for  they 
disappear  as  soon  as  rendered,  and  in  an  inventory  of  existing 
wealth,  personal  services  would  not  appear. 

Wealth  and  Income.  —  Wealth  refers  to  the  stock  of  goods  on 
hand  at  a  particular  time.  Real  income,  on  the  other  hand,  has 
reference  to  the  satisfaction  which  we  derive  from  the  use  of 
material  things  or  personal  services  during  a  period  of  time. 
Money  income  should,  perhaps,  refer  to  the  value  of  the  goods 
consumed  and  services  enjoyed,  although  in  popular  speech  and 
by  many  economists  the  word  is  used  in  the  literal  sense  of  the 
net  amount  of  money  that  comes  in,  whether  it  is  spent  for  en- 
joyable things  or  is  saved.  In  this  book  we  shall  use  the  term 
"  money  income  "  in  the  latter  sense. 

The  Individual  and  Society.  — One  distinction  runs  all  the  way 
through  political  economy,  and  that  is  the  distinction  between 
the  social  and  the  individual  standpoint.  That  which  is  wealth 
to  the  individual  is  often  not  wealth  to  society.  An  individual 
holding  a  government  bond  finds  that  he  can  exchange  it  for  the 
things  he  wants  almost  as  readily  as  though  it  were  gold  or  some 
other  commodity.  He  recognizes  that  the  paper  itself  cannot  be 
used  directly  for  any  useful  purpose,  yet  he  prizes  it  because  it 
represents  an  indisputable  claim  on  the  services  or  commodi- 
ties of  other  people.  If  the  bond  should  be  destroyed,  the  holder 
as  an  individual  would  suffer  loss,  but  society  as  a  whole  would 
be  neither  richer  nor  poorer,  and  society,  exclusive  of  the  bond- 
holder, would  have  gained  at  his  expense.  From  the  social  stand- 
point the  bond  is  not  wealth  at  all,  but  only  an  evidence  of  a  legal 
right  to  a  part  of  the  social  wealth.  All  property  rights  are  sim- 
ply claims  to  a  part  of  the  social  wealth  or  income.  The  claims 


ELEMENTARY   CONCEPTS  99 

to  concrete,  material  things,  such  as  farms  and  store  buildings, 
are  included  by  an  individual  when  he  enumerates  his  wealth; 
the  farms  and  store  buildings  are  social  wealth.  Again,  in  mak- 
ing an  inventory  of  his  wealth,  an  individual  would  not  ordinarily 
include  such  an  item  as  the  post  office,  which  is  public  and  not 
private  property;  but,  strictly  speaking,  the  post  office  is  owned 
jointly  with  other  members  of  society.  A  successful  patent  is 
frequently  looked  upon  as  an  item  of  wealth,  but  it  is  simply  a 
means  by  which  the  owner  gets  more  from  other  people  in  return 
for  his  services.  If  the  patent  is  declared  invalid,  others  gain 
what  he  loses  (not  counting  the  check  to  the  inventive  impulse). 
Again,  "good  will"  in  business  is  frequently  paid  for  as  though 
it  were  an  economic  good,  and  is  wealth  from  the  individual 
point  of  view,  but  it  is  not  social  wealth.  If  a  business  man  loses 
his  established  trade,  his  competitors  are  the  gainers;  society 
as  a  whole  is  not  affected.  This  distinction  between  individual 
and  social  wealth,  however,  is  valid  only  when  we  look  upon  the 
social  wealth  as  composed  of  concrete  material  objects.  When 
we  are  measuring  the  amount  of  wealth  in  dollars,  no  such  dis- 
tinction can  be  drawn.  To  attempt  to  say  how  much  an  item 
of  wealth  is  worth  from  the  social  point  of  view  and  how  much 
from  the  individual  point  of  view,  would  be  futile.  The  owner 
of  a  franchise  that  is  declared  invalid  suffers  financial  loss;  the 
community  suffers  no  loss,  for  the  tangible  property  which  yields 
the  enjoyable  services  is  not  affected.  Here  is  a  valid  distinction 
between  the  individual  and  social  points  of  view,  but  from  any 
point  of  view  it  cannot  be  denied  that  the  selling  value  of  the 
property  has  been  decreased. 

Wealth  and  Value.  —  In  the  preceding  paragraphs  wealth  has 
been  spoken  of  as  consisting  of  particular  things.  A  lead  pencil 
and  the  year's  crop  of  wheat  are  both  wealth.  How  shall  we 
measure  the  amount  of  wealth  that  these  objects  represent? 
Since  the  items  of  wealth  are  composed  of  very  heterogeneous 
objects,  we  cannot  use  such  units  of  measure  as  bushels,  pounds, 
or  feet.  We  must  select  a  measure  that  has  reference  to  some 
quality  common  to  all  kinds  of  wealth.  This  quality  is  the  power 
to  give  satisfaction  to  those  who  have  unsatisfied  wants,  and  a 


100  OUTLINES   OF  ECONOMICS 

measure  based  upon  this  quality  is  value.  This  is  a  subject 
which  will  be  discussed  in  detail  later,  the  valuation  of  goods  and 
personal  services  being  the  central  problem  in  economic  theory. 
It  is  sufficient  to  say  at  this  point  that  high  value  in  an  object 
implies  the  existence  of  important  unsatisfied  wants  which  this 
object  is  capable  of  satisfying.  Thus,  free  goods  have  no  value, 
not  because  they  do  not  satisfy  important  wants,  but  because 
these  wants  do  not  ordinarily  go  unsatisfied. 

Capital  and  Other  Forms  of  Wealth.  —  Some  material  things, 
as  well  as  personal  services,  yield  satisfaction  to  human  beings 
directly.  From  clothes,  dwellings,  food  upon  the  table,  musi- 
cal instruments,  and  the  like,  we  derive  enjoyment  directly. 
These  are  consumption  goods.  Other  goods  are  of  service  only 
indirectly.  A  plow,  we  say,  is  useful,  but  we  cannot  eat  or  wear 
it.  It  simply  helps  to  produce  the  things  that  we  can  enjoy. 
Such  articles  are  production  goods. 

The  distinction  is  a  matter  of  degree.  Even  the  food  upon  the  table  is  not 
quite  ready  to  be  enjoyed.  It  must  be  handled  with  knives  and  forks. 
This  has  led  some  writers  to  make  no  distinction  between  wealth  and  capital 
goods.  But  it  has  been  pointed  out  that  great  differences  in  degree  are  more 
important  than  many  differences  in  kind.  The  distinction,  it  may  also  be 
noted,  is  not  made  on  the  ground  of  durability.  Consumption  goods  may 
be  very  durable,  such  as  a  painting  or  work  of  fiction. 

Production  goods,  again,  are  divided  into  capital  goods  and 
land.  Land  is  a  gift  of  nature;  capital  goods  —  machinery, 
warehouses,  raw  material,  etc.  —  are  produced  by  man.  Other 
differences  between  these  two  classes  will  be  discussed  later. 

Capital  Goods  and  Capital  Value.  —  Capital  goods,  as  well  as 
other  forms  of  wealth,  are  of  such  a  heterogeneous  nature  that 
we  cannot  measure  them  by  such  units  as  pounds  or  inches. 
Here,  again,  we  must  select  some  quality  that  is  common  to  all 
of  them,  which  is  value,  and  this  can  be  measured  in  terms  of 
dollars.  Very  frequently  the  value  of  capital  goods  is  confused 
with  the  concrete  good  itself.  A  typewriter  is  a  tangible,  material 
capital  good;  its  weight  is  measured  by  pounds;  its  bulk  by  cu- 
bic inches;  its  value  by  dollars.  In  this  book  the  word  "  capital " 
is  frequently  used  as  a  short  expression  for  either  of  the  phrases 


ELEMENTARY   CONCEPTS 


101 


"  capital  goods  "  and  "  capital  value,"  but  it  will  always  be  clear 
from  the  context  which  is  meant. 

Social  and  Individual  Capital.  — The  individual  may  include 
items  in  an  enumeration  of  his  capital  which  are  not  capital 
from  the  standpoint  of  society.  The  landlord  who  has  dwell- 
ings to  let  regards  them  as  part  of  his  capital,  but  from  the  social 
standpoint  they  are  consumption  goods.  We  may  call  such 
goods  acquisitive  capital.  Again,  a  street  railway  may  consider 
its  franchise  as  a  part  of  its  capital,  but  from  the  social  standpoint 
a  franchise  is  not  capital  at  all,  nor  even  a  good,  but  is  simply  a 
right  to  use  the  streets  in  a  certain  manner.  Destroy  the  fran- 
chise, and  the  items  of  social  capital  would  not  be  directly  les- 
sened. 

Figure  i  will  make  clear  these  various  distinctions:  — 


Circle  A  B  represents  goods. 

Circle  AC  represents  economic 
goods. 

Circle  AE  represents  producers' 
goods. 

Circle  AF  represents  land. 

Zone  BC  represents  free  goods. 

Zone  CE  represents  consumers' 
goods. 

Zone  DE  represents  acquisitive 
capital. 

Zone  EF  represents  social  capi- 
tal. 


FIG.  i 


The  National  Wealth  and  the  National  Dividend.  —  Attempts 
have  been  made  to  ascertain  the  total  wealth  of  a  nation.  The 
latest  estimate  made  for  the  United  States  by  the  census  authori- 
ties is  given  on  the  following  page. 

Such  a  table  is  useful,  even  though  it  may  contain  some  rather 
arbitrary  estimates,  as  showing  the  relative  importance  of  dif- 
ferent classes  of  our  material  equipment.  Notice  the  small  total 
value  of  the  metals  used  as  money  and  the  relatively  large  value 
embodied  in  real  property.  It  is  rather  surprising  that  manu- 
facturing machinery,  tools,  and  implements  are  worth  less  than 


102 


OUTLINES   OF  ECONOMICS 


ESTIMATES  OF  WEALTH  FOR  1900  AND  1904 


FORMS  OF  WEALTH 

1904 

1900 

Real  property  and  improvements 
—  taxed       

$55,510,228,057 

6,831,244,570 
4,073,791,736 
844,989,863 

3>297>754,i8o 
1,998,603,303 
11,244,752,000 

2,219,966,000 

227,400,000 
585,840,000 
123,000,000 
846,489,804 
275,000,000 

562,851,105 

1,899,379,652 
7,409,291,668 
495,543,685 
408,066,787 

2,500,000,000 
5,750,000,000 

$46,324,839,234 

6,212,788,930 
3,306,473,278 
749,775,97° 

2,541,046,639 

1,677,379,825 
9,035,732,000 

1,576,197,160 
211,650,000 
400,324,000 
98,836,600 
537,849,478 
267,752,468 

402,618,653 

1,455,069,323 
6,087,151,108 

424,970,592 
326,851,517 

2,000,000,000 
4,880,000,000 

Real  property  and  improvements 
—  exempt  

Live  stock  

Farm  implements  and  machinery 
Manufacturing  machinery,  tools, 
and  implements     

Gold  and  silver  coin  and  bullion 
Railroads  and  their  equipment.  . 
Street  Railways,  etc.  : 
Street  railways  .            

Telegraph  systems 

Telephone  systems  

Pullman  and  private  cars  .... 
Shipping  and  canals  

Privately  owned  waterworks.  . 
Privately  owned  central  elec- 
tric light  and  power  stations 
All  other  : 
Agricultural  products  

Manufactured  products  

Imported  merchandise  

Mining  products  

Clothing  and  personal  adorn- 
ments   

Furniture,  carriages,  and  kin- 
dred property  

Total  

$107,104,192,410 

$88,517,306,775 

our  live  stock.  But  great  care  should  be  taken  in  comparing 
the  total  wealth  as  estimated  in  this  and  in  preceding  census 
valuations  and  in  drawing  conclusions  as  to  the  significance  of  a 
growth  in  national  wealth  measured  in  dollars. 

In  addition  to  the  difficulty  of  getting  accurate  information 
on  these  various  items,  there  are  several  things  to  be  kept  in 
mind  in  making  use  of  such  an  estimate.  First,  the  returns  are 


ELEMENTARY   CONCEPTS 


103 


made  in  money,  so  that  fluctuations  in  the  value  of  money  will 
show  a  change  in  the  total  valuation  even  if  there  is  no  change 
in  the  relation  between  the  wants  of  a  community  and  its  goods 
other  than  money.  Again,  free  goods  are  not  included  in  such 
an  estimate.  Also,  a  good  deal  of  public  property  does  not  have 
a  money  estimate  put  upon  it.  Who  would  attempt  to  say  what 
our  rivers  and  harbors  are  worth,  and  yet  why  should  not  these 
be  included  in  the  estimate  if  our  canals  are? 

It  seems  that  much  that  is  included  in  the  estimate  is  wealth 
from  the  individual  standpoint  only,  but  not  from  the  social,  as 
in  the  case  of  the  valuation  of  a  business  whose  value  consists 
largely  of  patents  or  monopolistic  privileges.  In  the  table  above, 
for  example,  the  value  of  railways  in  1904  was  obtained  by  capi- 
talizing their  net  earnings.  Is  this  sum  properly  included  in  an 
estimate  of  the  total  amount  of  wealth  in  the  United  States? 
The  inclusion  is  proper  if  we  are  confining  ourselves  to  a  state- 
ment of  the  sum  of  the  values  of  property  rights,  but  it  is  mislead- 
ing if  we  wish  to  show  the  relative  importance  of  railways  and  of 
property  in  a  competitive  industry,  or  if  we  are  discussing  rail- 
ways in  relation  to  the  public  welfare.  A  similar  line  of  thought 
is  suggested  with  reference  to  land  values.  Ten  years  ago  we 
had  about  the  same  area  and  the  same  quality  of  land  as  we  now 
have,  so  that  its  high  value  to-day  cannot  mean  that  we  are  better 
equipped  with  natural  resources. 

We  must  be  on  our  guard  against  attaching  improper  signifi- 
cance to  estimates  of  total  wealth.  Changes  in  total  value  are 
not  an  accurate  index  of  changes  in  well-being.  It  is  possible 
that  an  increase  in  concrete  material  goods  will  actually  decrease 
the  total  quantity  of  wealth  measured  in  dollars.  A  hundred 
bushels  of  wheat  at  $i  per  bushel  have  a  higher  selling  value 
than  two  hundred  bushels  at  40  cents  per  bushel.  If  by  some 
magical  process  all  goods  could  be  made  free  as  air,  there  would 
be  no  value  whatever.  An  estimate  of  the  value  of  our  stock  of 
wealth  also  necessarily  omits  to  take  account  of  personal  services. 
It  is  obvious  also  that  per  capita  wealth  has  a  more  direct  rela- 
tion to  well-being  than  total  wealth.  Individual  wealth  and  value 
connote  scarcity;  well-being  implies  abundance.  Nevertheless. 


104  OUTLINES   OF  ECONOMICS 

under  present  conditions,  it  is  probable  that  an  increase  in  per 
capita  individual  wealth,  when  not  due  to  fluctuations  in  the  value 
of  money,  also  indicates  an  increase  in  well-being.  There  is  no 
likelihood  of  our  being  able  to  increase  the  quantity  of  economic 
goods  to  such  an  extent  as  to  render  them  free  and  hence  value- 
less; and,  on  the  other  hand,  as  will  be  more  fully  explained 
later,  new  wants  are  constantly  developing,  and  value  is  at  bottom 
the  power  to  minister  to  unsatisfied  wants. 

The  national  income  is  a  concept  which  takes  account  of  the 
services  rendered  directly  by  persons  as  well  as  of  the  material 
things  that  are  used.  The  national  income,  objectively  consid- 
ered, is  a  gigantic  stream  of  food,  clothes,  comforts,  personal  ser- 
vices, etc.,  which  is  used  up  in  the  direct  satisfaction  of  wants  in  a 
specified  period,  such  as  a  year,  by  the  millions  of  individual  acts 
of  consumption.  Some  writers  would  include  also  the  additions 
to  our  industrial  equipment,  such  as  new  machines;  but  they 
may  also  be  regarded  as  promises  of  an  enlarged  future  income 
of  society,  not  a  part  of  its  present  real  income.  These  two  views 
correspond  to  the  two  definitions  of  income  on  page  98. 

It  is  difficult  to  make  an  accurate  estimate  of  the  national  in- 
come in  terms  of  its  money  value,  and  not  much  confidence  can 
be  placed  in  the  estimates  that  have  been  made.  A  reliable  cal- 
culation of  this  kind  would,  however,  be  useful  as  an  index  of 
the  maximum  gain  that  might  be  derived  by  the  mass  of  the  people 
from  agitation  for  a  more  nearly  equal  distribution  of  wealth.  It 
would  be  interesting  to  know  what  the  scale  of  living  would  be  if 
the  national  income  were  equally  distributed.  At  present  we  do 
not  know  whether  a  family  of  five  persons  would  have  $800  or 
$1600  to  spend. 

The  national  income  may  be  looked  upon  as  the  national  divi- 
dend, the  sum  total  of  good  things  to  be  divided  among  the  vari- 
ous families  or  individuals.  The  forces  determining  the  size  of 
this  dividend,  the  manner  of  its  division,  and  the  saneness  of  its 
use  are  the  main  topics  for  discussion  in  political  economy,  and 
hence  it  will  be  our  purpose  in  subsequent  chapters  to  describe 
the  general  tendencies  in  the  consumption,  the  production,  and 
the  distribution  of  wealth  and  income. 


ELEMENTARY   CONCEPTS  105 

QUESTIONS    AND   EXERCISES 

1.  Does  the  following  statement  agree  with  the  definitions  in  the  text? 
"The  true  basis  for  an  estimate  of  a  nation's  wealth  is  to  be  found  in  the  en- 
joyments of  its  members."     Hadley,  Economics,  p.  4. 

2.  Are  the  following  wealth :  air  ?  whisky  ?  a  copyright  ?  Lake  Michigan  ? 
skill  as  a  carpenter  ?  good  health  ? 

3.  Discuss  the  following :  "  Among  the  motives  which  lead  men  to  accumu- 
late wealth,  the  primacy,  both  in  scope  and  intensity,  therefore,  continues  to 
belong  to  this  motive  of   pecuniary  emulation."     Veblen,   Theory  of   the 
Leisure  Class,  p.  34. 

4.  State  the  significance  of  the  following :  "  A  horse  is  not  wealth  to  us  if 
we  cannot  ride,  nor  a  picture  if  we  cannot  see,  nor  can  any  noble  thing  be 
wealth  except  to  a  noble  person."     Ruskin,  Munera  Pulveris,  p.  10. 

5.  Discuss  the  following  statement :  "  In  1770  Arthur  Young  reckoned  the 
income  of  England  to  be  £120,000,000;  in  1901  the  income  may  be  roughly 
set  down  at  £1,600,000,000.     Making  correct    allowances  for    population 
and  for  prices,  this  growth  of  income  would  signify  a  large  increase  of  com- 
modities per  head ;  but  would  it  tell  us  that  we  are  working  and  living  some- 
what better  than  our  ancestors?"     Hobson,  The  Social  Problem,  p.  43. 

REFERENCES 

CARVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  III. 

CLARK,  J.  B.     The  Philosophy  of  Wealth,  Chaps.  I  and  III. 

FISHER,  IRVING.     The  Nature  of  Capital  and  Income,  Chaps.  I  and  II. 

HOBSON,  J.  A.     The  Social  Problem,  Book  I,  Chap.  V. 

LESLIE,  T.  E.  C.     Essays  in  Political  Economy,  Chap.  I. 

MALLET,  B.     A  Method  of  Estimating  Capital  Wealth  from  the  Estate  Duty 

Statistics,  Journal  of  the  Royal  Statistical  Society,  March,  1908. 
MARSHALL,  ALFRED.     Principles  of  Economics,  Book  II. 
RUSKIN,  JOHN.     Munera  Puheris,  Chap.  I. 

SIDGWICK,  HENRY.     The  Principles  of  Political  Economy,  Book  I,  Chap.  III. 
SMART,  WILLIAM.     Studies  in  Economics,  Chap.  VIII;  and  Distribution  of 

Income,  Book  II. 
SPAHR,  C.  B.      The  Present  Distribution  of  Wealth  in  the  United  States, 

Chap.  V. 

VEBLEN,  T.  B.     The  Theory  of  the  Leisure  Class,  esp.  pp.  24-34. 
WAGNER,  ADOLPH.     Crundlegung  der  politischen  Oekonomie,  3d  ed.,  VoL 

I,  pp.  83-135. 
Special  Census  Reports,  1907,  Wealth,  Debt,  and  Taxation. 


PART   II 
CONSUMPTION 

CHAPTER   VIII 
CONSUMPTION 

Consumption  Defined.  —  Consumption  in  economics  means  the 
use  of  goods  in  the  satisfaction  of  human  wants,  which  is  the  pur- 
pose of  a  large  part  of  our  economic  activity,  but  it  is  not  the  sole 
purpose,  since  activity  is  to  a  certain  extent  an  end  in  itself.  Nev- 
ertheless, in  economic  society  as  it  is  organized  to-day  we  are  per- 
haps justified  in  looking  upon  consumption  as  the  motive  force 
behind  production.  Wants  are  so  far  from  satisfied  at  present 
that  men  look  for  work,  not  because  they  seek  to  be  rid  of  surplus 
energy,  but  because  they  crave  the  goods  which  their  wages  will 
buy.  The  power  of  unrestricted  consumption  seems  to  be  the 
prevailing  ideal.  Industry,  furthermore,  is  organized  and  con- 
ducted primarily  to  satisfy  the  consumer,  not  the  worker.  This 
fact  is  the  basis  of  the  Consumers'  League,  which  aims  to  improve 
conditions  of  production  by  asking  the  consumer  to  refuse  to  pur- 
chase the  goods  of  unfair  employers. 

A  study  of  the  consumption  of  wealth  falls  only  partly  within 
the  domain  of  economics,  for  the  use  of  wealth  is  a  large  part  of 
the  problem  of  life.  Passing  judgment  on  the  standards  accord- 
ing to  which  the  rationality  of  certain  wants  is  to  be  measured 
does  not  directly  concern  the  economist. 

Productive  and  Final  Consumption.  —  When  used  without  quali- 
fication, the  word  "  consumption  "  in  economics  is  commonly  taken 
to  refer  to  the  use  of  goods  to  satisfy  wants  directly.  But  some 
goods,  such  as  machines  and  raw  materials,  are  used  up  in  the 
production  of  other  goods.  This  we  may  call  productive  consump- 
tion, while  that  consumption  which  attains  the  ultimate  goal  of 

106 


CONSUMPTION 


107 


economic  activity  directly  in  the  satisfaction  of  wants  is  final  con- 
sumption. It  is  now  less  necessary  than  it  was  in  the  days  of  Car- 
lyle  and  Ruskin  to  insist  that  food  consumed  by  laborers  is  not 
productive  consumption.  They  consume,  not  merely  for  the  sake 
of  production,  but  also  for  the  sake  of  satisfaction.  Man  is  our 
final  term. 

Human  Wants.  —  In  the  study  of  human  wants  as  a  starting 
point  in  economic  theory,  two  facts  stand  out  prominently:  the 
expansion  in  the  number  and  variety  of  the  wants,  and  the  satia- 
bility  of  any  particular  one  of  them.  As  man  has  progressed  from 
savagery  to  civilization,  the  variety  of  things  he  desires  and  even 
considers  necessary  to  his  existence  has  expanded  enormously. 
His  interests  become  more  varied,  his  capacity  to  enjoy  becomes 
larger,  and  he  lives  a  fuller  and  more  complex  existence.  There 
are  indeed  those  who  would  have  us  "return  to  nature  "  and  live 
a  simple  life,  but  taking  the  world  as  it  is,  we  may  assume  that 
there  is  no  limit  to  the  capacity  of  the  community  to  use  more 
goods. 

But  when  we  turn  to  the  consideration  of  some  particular  want 
by  itself,  the  matter  is  wholly  different.  Our  nerves  grow  weary 
of  a  repeated  stimulus,  and  any  attempt  to  continue  indefinitely 
the  enjoyment  of  some  sensation  results  in  satiation.  A  phono- 
graph record  grows  stale  after  a  number  of  repetitions.  An  apple 
does  not  always  have  the  same  degree  of  utility  for  any  one  of  us, 
van-ing  from  the  highest  degree,  if  we  are  on  the  point  of  starva- 
tion, to  disgust,  if  a  considerable  number  have  just  been  con- 
sumed. 

Law  of  Diminishing  Utility.  —  This  fact  is  of  fundamental  im- 
portance in  the  study  of  economics  and  has  been  dignified  by  the 
term  "the  law  of  diminishing  utility."  In  formal  words:  The 
intensity  of  our  desire  for  additional  units  of  any  commodity  de- 
creases as  we  consume  successive  portions.  It  should  be  observed 
that  an  interval  of  time  between  the  successive  acts  of  consump- 
tion may  permit  our  nerves  to  recuperate  so  that  no  diminution  in 
the  degree  of  utility  is  apparent.  Again,  the  increase  in  a  person's 
stock  of  an  article  held  for  the  purpose  of  exchange,  such  as  money, 
can  cause  a  decrease  in  the  utility  of  an  additional  unit  only  to  the 


Io8  OUTLINES   OF  ECONOMICS 

extent  that  all  of  his  wants  are  being  satisfied,  since  such  an  ex- 
changeable commodity  in  reality  stands  for  all  commodities  avail- 
able to  him.  Again,  consumption  of  certain  articles  may  result 
in  the  development  of  new  related  wants.  The  amateur  pho- 
tographer, for  example,  finds  that  the  crude  pictures  which  de- 
lighted him  at  first  give  him  less  and  less  pleasure,  but  his  interest 
in  photography  may  continue  to  increase  because  he  sees  an  end- 
less variety  of  results  to  be  achieved. 

Different  Uses  for  the  Same  Commodity.  —  In  the  preceding 
paragraph  mention  was  made  of  the  different  degrees  of  intensity 
of  a  particular  want.  The  utility  of  a  commodity  may  also  vary 
because  of  its  capacity  to  satisfy  different  wants  of  varying  im- 
portance. Thus  water,  first  of  all,  satisfies  thirst.  The  impor- 
tance of  this  utility  is  altogether  incalculable,  for  without  it  we 
should  die.  Then  it  serves  for  bathing,  a  use  which  certainly 
seems  essential,  but  one  which  is  far  less  urgent  than  the  foregoing. 
If  we  had  to  do  without  one  or  the  other,  there  is  no  doubt  which 
we  should  prefer.  Then  it  serves  for  washing  dishes,  clothes,  and 
a  multitude  of  such  things,  then  for  sprinkling  lawns  and  streets, 
then  for  fountains,  artificial  ponds,  etc.  All  these  uses  and  many 
more  are  economic,  because  men  will  and  do  pay  for  water  to 
satisfy  these  wants. 

Marginal  Utility. — It  must  be  evident,  therefore,  that  to  say 
that  a  certain  thing  is  a  utility  is  very  indefinite.  That  merely 
tells  us  that  it  is  capable  of  satisfying  some  want,  perhaps  impor- 
tant, perhaps  unimportant.  We  become  definite  only  when  we 
have  specified  the  degree  of  utility  possessed  by  the  commodity. 
This  is  commonly  called  its  final  or  marginal  utility,  because  when 
we  think  of  a  commodity  as  consumed  in  successive  portions,  the 
present  is  the  last  or  marginal  unit  consumed.  Marginal  utility 
means  simply  the  importance  which  is  attached  to  an  additional 
unit  of  the  commodity  at  the  present  moment.  This  individual 
valuation  of  a  unit  of  the  commodity  may  be  spoken  of  as  its  sub- 
jective value.  This  is  to  be  distinguished  from  its  market  value, 
or  what  can  be  obtained  in  exchange  for  the  commodity,  which  is 
a  resultant  of  many  individual  valuations.  Market  value  will  be 
discussed  in  subsequent  chapters. 


CONSUMPTION 


FIG. 


A  clearer  notion  of  subjective  value  (or  marginal  utility)  may 
be  given  with  the  help  of  Figure  i,  following.  We  return  to 
our  illustration  of  water,  which  we  remember  had  numerous 
uses  of  various  degrees  of  importance.  We  have  marked  off  dif- 
ferent portions  of  the  base 
line  representing  quantities 
of  water  available  for  man's 
use.  The  first  quantity,  ab, 
is  just  enough  for  drinking 
purposes.  Suppose  this  is 
all  the  water  to  be  had. 
There  will  be  no  question 
of  sprinkling  lawns  or  even 
of  bathing  under  such  cir- 
cumstances. What  will  be 
the  utility  of  water?  Evi- 
dently the  extent  of  the  service  which  it  renders  us,  and  as  this  is 
the  preservation  of  our  life  we  cannot  estimate  it.  We  will  indi- 
cate it  by  the  area  above  the  line  ab  which  runs  upward  indefi- 
nitely as  the  curved  line  fails  to  close  in.  What  will  be  the  impor- 
tance of  another  portion  of  water  at  this  point  of  supply  ?  As  this 
additional  portion  which  we  desire  is  not  needed  for  drinking  but 
for  a  less  important  purpose,  the  subjective  value  of  the  water 
will  now  depend  upon  this  less-important  want.  Now  suppose 
we  have  three  portions  of  water,  represented  by  the  lines  ab,  be, 
and  cd.  We  now  have  enough  for  all  our  wants,  down  to  sprin- 
kling the  lawn  and  the  street.  We  are  willing  to  pay  something 
for  more  water  for  this  purpose,  but  how  much?  As  much  as 
when  we  had  only  water  enough  to  drink  ?  By  no  means.  The 
next  want  on  our  list  is  comparatively  unimportant,  and  of  course 
we  value  an  increased  supply  accordingly.  With  two  or  three 
more  portions  of  water  all  our  wants  are  satisfied,  and  water  will 
have  for  us  no  value  whatever.  Its  marginal  utility  will  have 
become  zero.  As  the  amount  of  water  is  increased,  the  subjec- 
tive value  falls  according  to  the  curved  line  hi,  till  finally  it  touches 
the  base  line,  where  the  utility  of  the  water  ceases  and  it  has  no 
value  at  all. 


no 


OUTLINES   OF  ECONOMICS 


It  should  be  carefully  noted  that  marginal  utility  tells  us  noth- 
ing about  the  total  subjective  value  of  the  whole  stock  of  the  com- 
modity. It  refers  solely  to  the  present  value  of  an  additional  unit, 
or  the  sacrifice  that  would  be  occasioned  by  the  loss  of  a  unit. 
We  cannot  get  the  total  subjective  value  by  multiplying  the  margi- 
nal utility  by  the  number  of  units,  even  though  they  be  all  alike. 
The  very  term  "marginal"  tells  us  that  the  conception  implies 
successive  additions,  and  the  present  value  of  an  additional  unit 
tells  us  nothing  definite  about  the  marginal  utility  at  a  previous 
period.  If  we  wish  to  ascertain  the  total  subjective  value  of  a 
stock  of  a  commodity,  we  have  simply  to  treat  it  as  one  large  unit, 
and  ask  what  would  be  lost  if  it  were  taken  away.  By  this  test 
all  air  would  be  found  to  have  an  immeasurable  utility,  at  the 
same  time  that  the  marginal  utility,  that  is,  the  subjective  value 
of  an  additional  quart,  would  be  nothing.  Thus  it  will  be  seen 
that  the  cause  of  subjective  value  is  utility  under  a  condition  of 
scarcity;  that  is,  such  a  limitation  of  the  supply  that  all  wants 
cannot  readily  be  satisfied. 

The  Economic  Order  of  Consumption.  —  What  has  been  said 
regarding  the  way  in  which  our  individual  estimates  of  the  im- 
portance of  a  commodity  are  determined  will  help  to  explain  how 
we  make  our  choices  in  attempting  to  obtain  the  largest  amount 


la 


Ib 


Ic 


Id 


2  a 


2c 


FIG. 


FIG.  3 


of  satisfaction  with  the  income  at  our  disposal.     Evidently  we  must 
spend  each  succeeding  dollar  for  purchasing  that  commodity  of 


CONSUMPTION 


III 


which  a  dollar's  worth  will  give  the  greatest  satisfaction.  Let  Fig- 
ures 2  and  3  show  the  declining  importance  of  two  commodities 
which  an  individual  is  consuming,  and  suppose  that  each  unit 
of  each  commodity  costs  one  dollar.  If  the  individual  has  ten 
dollars  to  spend  upon  these  two  commodities,  his  order  of  con- 
sumption will  be  as  follows:  he  would  begin  with  2a,  but  another 
unit  of  commodity  2  would  give  him  less  satisfaction  than  a 
unit  of  commodity  i.  Hence,  his  consumption  will  continue  as 
follows :  — 

la,  2b,  20,  ib,  ic,  id,  zd,  2e,  le. 

In  this  illustration  it  was  assumed  that  a  unit  of  each  commodity 
had  the  same  cost.  In  this  case,  the  unit  consumed  is  always  the 
one  that  has  the  largest  marginal  utility.  But  where  the  cost  of 
the  units  is  different,  cost  must  be  considered  also,  and  we  com- 
monly do  so  by  asking  ourselves  whether  the  thing  we  are  buying 
is  worth  as  much  as  other  things  which  could  be  obtained  with 
the  same  expenditure.  Thus  we  are  constantly  abstaining  from 
the  further  consumption  of  one  thing,  not  because  our  wants  for 
it  are  fully  satisfied,  but  because  something  else  of  equal  cost 
appears  at  that  moment  to  be  more  important. 

Future  Wants.  —  Not  all  of  the  goods  for  which  we  strive  are 
wanted  for  present  consumption.  We  recognize  that  we  shall 
have  needs  next  month  or  next  year,  and  we  attempt  to  make  some 
preparation  for  them.  These  future  wants,  it  is  true,  usually  ap- 


1m 


Ib 


Ic 


Id 


FIG.  4 


•    Z  fit        Sf  0   i    *  C     |*^*J     _ 

FIG.  5 


peal  to  us  less  vividly  than  if  they  were  present,  but  we  attach  a 
definite  importance  to  them  and  grade  them,  and  they  enter  into 


112  OUTLINES   OF  ECONOMICS 

our  calculations  when  we  spend  money,  modifying  the  order  oi 
our  consumption.  This  will  be  seen  from  Figures  4  and  5.  Let 
us  suppose  that  in  Figure  4,  a,  b,  c,  d,  c  represent  the  diminishing 
importance  of  successive  units  of  a  commodity  for  present  con- 
sumption, and  that  Figure  5  shows  the  importance  of  similar  quan- 
tities of  the  same  commodity  for  future  consumption.  Then  la 
would  be  consumed  first,  i.e.  in  the  present.  But  a  second  unit 
now  would  be  less  important  in  this  individual's  estimation  than 
the  saving  of  a  unit  for  future  use.  The  second  unit,  therefore, 
that  is  consumed  would  be  20,,  and  then  the  order  would  be  as 
follows:  ib,  2b,  ic,  etc.  Thus  this  individual  has  saved  two  out 
of  five  units,  i.e.  2d  and  2b,  with  the  same  sort  of  mental  calcu- 
lation as  he  would  use  in  deciding  to  spend  a  nickel  for  a  peach 
rather  than  for  a  pear.  But  if  some  one  should  ask  him  to  spend 
his  fifth  dollar  for  20  instead  of  for  ic,  he  would  require  some  extra 
inducement  to  repay  him  for  the  loss  in  enjoyment.  It  thus  ap- 
pears that  a  certain  amount  of  saving  is  done  without  irksome- 
ness,  which  emerges  only  when  the  saving  is  carried  beyond  a 
certain  point. 

Alleged  Present  Consumption  of  Future  Products.  —  We  often 
hear  of  consumption  in  advance  of  production.  It  is  said  people 
live  on  the  future.  It  is  frequently  argued  that  during  the  Civil 
War  we  were  consuming  faster  than  we  were  producing.  It  is 
alleged  that  the  federal  bonds  represented  the  consumption  of 
future  earnings.  But  it  must  be  apparent  that  it  is  impossible 
to  consume  faster  than  we  produce  unless  we  consume  past  sav- 
ings by  not  replacing  worn-out  equipment.  We  cannot  eat  to-day 
the  wheat  or  potatoes  of  to-morrow,  nor  can  we  wear  coats  before 
they  are  made.  What  is  alleged  can  only  be  true  of  the  individual 
consumer  within  the  nation,  or  in  case  of  the  nation  as  a  whole 
when  the  capital  or  other  wealth  of  the  country  is  diminishing, 
whereas  during  our  Civil  War  it  increased.  What  really  hap- 
pened was  this:  we  as  a  nation  became  indebted  to  some  extent 
to  foreigners,  and  within  the  nation  some  of  us  gained  while  the 
rest  were  losing.  Bonds  do  not  represent  a  present  consumption 
of  future  wealth,  but  a  special  use  of  productive  power  for  which 
a  government  agrees  to  remunerate  its  owners  in  the  future.  If 


CONSUMPTION  n-j 

war  can  be  carried  on  with  the  aid  of  bonds,  it  can, —  leaving  out 
of  consideration  what  foreigners  send  us,  —  with  a  sufficiently  per- 
fect taxing  machinery,  conceivably  always  and  practically  some- 
times, be  carried  on  without  bonds.  It  is  only  a  question  of  how- 
to  get  hold  of  the  means  of  producing  powder  and  bullets.  War 
was  formerly  carried  on  without  bonds;  they  are  a  comparatively 
recent  contrivance.  Consumption  can  never  anticipate  future 
production  for  the  nation  as  a  whole  taken  by  itself;  it  can  only 
anticipate  future  ownership. 

Consumption  and  Saving.  —  It  is  difficult  to  say  in  practice  at 
what  point  consumption  should  stop  and  saving  begin,  but  the 
principle  itself  is  clear.  So  much,  and  only  so  much,  should  be 
saved  as  will  maintain  a  maximum  final  consumption  over  long 
periods  of  time.  It  is  conceivable  that  the  present  generation 
might  deny  itself  everything  except  the  barest  necessities  and 
labor  to  increase  the  productive  equipment  to  be  used  in  the  future; 
but  the  next  generation  could  not  pursue  the  same  policy,  for 
some  one  must  consume  the  products  of  the  factories  built  to-day, 
otherwise  the  building  of  them  was  wasted  effort. 

To  provide  for  old  age  or  for  possible  accident  may  be  a  suffi- 
cient motive  for  saving  in  some  cases,  but  saving  is  stimulated 
when  the  goods  saved  will  bring  an  increase.  It  is,  therefore, 
necessary  to  an  extensive  saving  that  the  conditions  of  profitable 
investment  should  be  provided;  and  if  wealth  is  to  be  widely  dif- 
fused, opportunities  for  investment  should  be  readily  available. 
It  is  a  perceived  opportunity  to  make  an  investment  with  proba- 
bility of  increase  which  stimulates  saving  above  everything  else. 
Another  important  condition  is  security.  If  the  investments  of  a 
country  fluctuate  between  loss  of  principal  and  unreasonable  profit, 
the  condition  is  one  to  encourage  speculation  rather  than  saving. 
Among  the  institutions  which  encourage  saving  are  private 
property,  corporations,  cooperative  enterprises,  savings  banks, 
and  insurance. 

Luxury.  —  Luxury  is  the  name  of  a  vague  something  which 

society  has  always  viewed  with  a  sense  of  mingled  tolerance  and 

condemnation.     In  the  first  place,  it  is  clear  that  people  ordinarily 

consider  as  luxuries  many  things  in  themselves  innocent  and  de- 

i 


114  OUTLINES   OF  ECONOMICS 

sirable,  as  silk  dresses,  jewels,  pictures,  etc.  No  one  but  an  ascetic 
will  condemn  as  wrong  in  themselves  things  that  appeal  to  taste 
and  finer  appreciations,  and  yet  we  feel  that  the  use  of  such  things 
is  often  unjustifiable.  Second,  the  popular  idea  of  luxury  recog- 
nizes a  difference  in  persons.  We  cannot  help  condemning  in 
one  person  what  we  approve  in  another.  Third,  we  judge  luxury 
differently  at  different  times.  There  is  a  continual  transfer  of 
articles  from  the  list  of  luxuries  into  that  of  comforts  and  neces- 
sities. This  transfer  is  brought  about  by  the  consensus  of  social 
judgment,  and  is  increasingly  acquiesced  in  by  all.  So  we  see 
that  the  term  "  luxury  "  does  not  apply  to  goods  of  a  certain  char- 
acter, but  to  certain  goods  in  their  relation  to  time  and  person. 
For  the  purpose  of  discussion,  we  shall  define  luxury  simply  as 
excessive  consumption.  But  what  determines  whether  consump- 
tion is  excessive  or  not  ? 

The  answer  to  this  question  depends,  first,  upon  our  idea  of 
right  living,  and  second,  upon  our  idea  of  a  just  distribution  of 
wealth.  The  former  question  we  shall  not  discuss.  It  is  that 
of  the  simple  life  versus  the  complex  and  varied  life,  and  may  be 
left  to  the  sociologists,  philosophers,  and  moralists.  But  what  is 
a  just  distribution  of  wealth?  In  the  world's  speculation  upon 
this  subject,  three  ideas  stand  out  prominently:  (i)  equality, 
(2)  product,  (3)  needs.  Let  us  examine  these  three  bases  of 
distribution. 

The  ability  of  men  to  use  wealth  sanely  is  enormously  unequal, 
and  there  is  no  probability  that  this  inequality  will  soon  be  re- 
moved. To  distribute  wealth  equally,  therefore,  would  be  to  use 
goods  where  they  satisfied  trifling  wants  or  none  at  all.  But  in 
addition  to  its  wastefulness,  an  equal  distribution  is  further  objec- 
tionable because  of  the  discouragement  it  might  give  to  the  ener- 
getic members  of  the  community.  Would  a  man  continue  to 
work  hard  if  his  lazy  neighbor  received  as  much  as  he  ?  There 
is  only  one  sense  in  which  we  must  regard  men  as  equal,  and  that 
is  that  the  happiness  of  one  is  as  important  as  the  happiness  of 
another. 

That  wealth  should  be  distributed  according  to  what  men  pro- 
duce is  perhaps  the  most  widely  held  idea  at  the  present  time, 


CONSUMPTION  ue; 

sometimes  on  the  ground  that  it  is  theirs  by  natural  right,  which 
is  fallacious,  and  sometimes  on  the  ground  that  such  a  method 
of  distribution  is  a  cure  for  laziness.  There  is,  however,  great 
difficulty  in  applying  this  test  accurately  under  the  complex  con- 
ditions of  modern  industry.  Who  shall  say  what  the  president  of 
a  great  life  insurance  society  is  producing?  How  many  dollars' 
worth  has  a  physician  produced  who  has  saved  a  man's  life? 
However  satisfactory  the  test  of  productivity  may  be  in  the  case 
of  a  man  who  produces  a  pair  of  shoes  with  his  own  implements 
and  labor,  it  fails  at  many  points  under  modern  industrial  condi- 
tions, and  its  failure  has  become  increasingly  apparent  with  the 
growth  of  large-scale  production  and  monopoly. 

Those  who  are  impressed  with  the  difficulty  of  saying  what  a 
man  has  produced,  suggest  that  we  ascertain  what  he  needs.  This, 
it  is  true,  is  not  capable  of  exact  determination;  but  any  wide 
departures  from  justice  might  be  agreed  upon  by  judicial  inquiry. 
Needs  are  the  basis  of  the  distribution  within  the  family.  The 
solidarity  of  the  family  demands  it,  and  this  is  but  the  epitome 
and  type  of  the  solidarity  of  society.  It  is  unquestionably  in  the 
interest  of  society  that  those  with  the  highest  capacities  should  be 
allowed  to  attain  the  fullest  development  of  all  their  powers,  pro- 
vided these  powers  are  used  in  the  service  of  humanity.  What 
is  necessary  to  make  a  man  a  good  citizen?  That,  according  to 
this  third  view,  is  the  ultimate  test  of  a  just  distribution. 

It  is  not  necessary  for  us  to  select  as  a  practical  programme  any 
one  of  these  tests  and  wholly  reject  the  others.  The  first,  equal- 
ity, reminds  us  that  the  lowliest  human  being  is  to  be  looked  upon 
as  an  end,  not  as  a  means  to  the  happiness  of  others;  the  second 
is  safe  and  convenient  so  far  as  it  can  be  definitely  applied;  but 
the  final  test,  so  long  as  we  are  social  beings,  will  always  be  that 
of  needs,  understanding  by  "needs,"  not  what  the  individual  asks 
for,  but  what  is  required  for  a  full  development  of  his  powers. 

While,  then,  justifiable  consumption  will,  according  to  these 
principles,  be  exceedingly  variable,  can  any  one  for  a  moment 
claim  that  such  principles  now  govern  consumption?  Immense 
sums  are  squandered  on  passing  caprices  whose  satisfaction  can- 
not by  any  standard  be  considered  necessary.  On  the  other  hand, 


Il6  OUTLINES   OF   ECONOMICS 

multitudes  of  fine  natures  with  keen  appreciations  and  large  ca- 
pacities for  development  and  present  enjoyment  are  left  without 
the  means  for  either.  So  long  as  these  things  exist,  so  long  as  a 
vast  amount  of  the  world's  wealth  is  destroyed  by  vulgar  and  in- 
competent consumption  which  might  impart  satisfaction  of  a  high 
order  if  consumed  otherwise,  and  by  others,  the  moral  sense  of 
the  world  will  condemn  luxury  as  a  social  wrong. 

And  what  is  the  excuse  for  this  abuse  ?  Usually  the  simple  fact 
of  ownership.  "It  is  ours,"  they  say.  But  for  what?  Simply 
because  the  interests  of  production  require  capital  to  be  massed 
under  specialized  control.  There  is  no  more  reason  why  a  mil- 
lionaire should  consume  all  the  income  he  controls  than  there  is 
why  a  philosopher  or  an  artist  should  withhold  from  society  the 
satisfactions  afforded  by  his  genius.  A  successful  manufacturer 
once  expressed  the  opinion  that  a  man  has  the  right  to  put  down 
silk  velvet  on  a  muddy  crossing  to  walk  on  if  he  is  rich  enough 
to  afford  it.  When  a  man  tramples  in  the  mire  the  fruit  of  human 
industry,  he  tramples  with  it  human  rights  and  humanity,  and  he 
should  expect  humanity  to  avenge  the  affront.  The  right  of  pri- 
vate property,  like  other  social  institutions,  is  ever  on  trial.  The 
obsolete  objection  is  sometimes  urged  that  luxury  gives  employ- 
ment to  labor.  Does  not  philanthropic  and  productive  expendi- 
ture do  the  same?  But  that  is  not  the  question.  What  comes 
of  the  employment?  The  payment  of  wages  only  helps  men  to 
get  more  of  existing  goods  from  other  persons.  That  may  be 
good  for  those  workmen  individually,  but  the  only  way  to  help 
society  as  a  whole  is  to  give  men  useful  employment,  to  aid  and 
encourage  them  to  produce  needed  goods.  Every  employment  of 
labor  which  encourages  production  of  luxuries  is  a  misdirection 
of  social  energy,  an  encouragement  to  society  to  spend  its  money 
for  that  which  is  not  bread  and  its  labor  for  that  which  satisfieth 
not. 

Harmful  Consumption.  —  We  have  been  careful  to  avoid  the 
impression  that  luxury  consists  in  the  use  of  pernicious  goods. 
It  is  a  common  query,  "Why  should  I  not  have  this  if  it  does  me 
no  harm?"  This  we  have  tried  to  answer  in  the  preceding  para- 
graphs. A  luxury  may  be  a  positive  good  in  itself,  a  satisfaction 


CONSUMPTION  Iiy 

which  society  may  well  hope  to  make  general,  but  it  is  a  good 
which  society  cannot  yet  afford  because  other  and  greater  wants 
are  yet  unsatisfied.  But  there  is  another  kind  of  consumption 
which  is  objectionable  in  an  entirely  different  way,  not  because 
it  is  excessive  or  premature,  but  because  it  is  harmful  in  itself. 
Such  are  frequently  drugs  and  alcoholic  beverages.  As  we  have 
said  before,  these  wants  are  as  economic  as  any  other,  and  we 
have  no  intention  of  assuming  the  function  of  the  physiologist  or 
the  moralist  in  enumerating  the  evils  which  come  from  the  con- 
sumption of  certain  goods.  But  in  one  respect  we  have  a  distinct 
part  in  this  discussion.  All  production  is  for  the  sake  of  man, 
and  consumption  is  its  final  term.  But  in  turn  man  is  the  prin- 
cipal factor  in  production,  and  as  the  consumption  of  certain 
goods  affects  him,  the  result  is  necessarily  transmitted  to  the  pro- 
ductive process.  Now  the  consumption  of  certain  goods  clearly 
unfits  men  for  efficient  production,  lessening  bodily  vigor,  blunt- 
ing the  perception,  and  these  goods  the  economist  regards  as  harm- 
ful in  the  sense  of  being  destructive  of  human  energy. 

Statistics  of  Consumption. — Instructive  investigations  have  been 
made  as  to  the  relative  importance  of  the  leading  items  in  the  fam- 
ily budget.  The  late  Ernst  Engel,  the  former  distinguished  head 
of  the  Prussian  Statistical  Bureau,  advanced  the  theory  that  it 
might  be  possible  by  a  careful  study  of  a  sufficient  number  of 
family  budgets  for  a  period  of  years  to  indicate  the  broad  changes 
in  consumption,  and  thus  by  a  sort  of  social  signal  service  to  pre- 
dict the  coming  of  industrial  storms.  Nothing  has  been  so  far 
accomplished  along  this  line,  but  Engel's  tables  are  interesting. 
From  Table  I  (page  118)  he  deduces  the  following  four  propo- 
sitions :  — 

First.  — That  the  greater  the  income,  the  smaller  the  relative 
percentage  of  outlay  for  subsistence. 

Second.  — That  the  percentage  of  outlay  for  clothing  is  approxi- 
mately the  same,  whatever  the  income. 

Third.  — That  the  percentage  of  outlay  for  lodging  or  rent,  and 
for  fuel  and  light,  is  invariably  the  same,  whatever  the  income. 

Fourth.  — That  as  the  income  increases  in  amount  the  percent- 
age of  outlay  for  sundries  becomes  greater. 


n8 


OUTLINES   OF   ECONOMICS 


TABLE  I 
ENGEL'S  LAW  —  SAXONY 


ITEMS  OF  EXPENDITURE 

PER  CENT  OF  THE  EXPENDITURE  OF  THE 
FAMILY  OF 

A  Workingman 
with  an  Income 
of  from  $225 
to  $300  a  year 

A  Man  of  the 
Middle  Class 
with  an  Income 
of  from  $450 
to  $600  a  year 

A  Man  in  Easy 
Circumstances 
with  an  Income 
of  from  $750 
to  $1000  a  year 

i.  Subsistence  

62.0 
16.0 

I2.O 

s-°. 

2.O 
I.O 
I.O 

I.O 

95-o 
•5-° 

55-°] 
18.0 

I2.O 

5-Oj 
3-5 

2.0 
2.O 

2-5 

90.0 

IO.O 

50.0" 
18.0 

12.  0 

5-o. 

5-5 
3-o 
3-o 

3-5. 

85.0 

'S-o 

2.  Clothing  

•*.  Lodging.  . 

4.  Heat  and  light  

5.  Education,   public   worship, 
etc  

6.  Legal  protection  '   .  . 

7.  Care  of  health  

8.  Comfort,  mental  and  bodily 
recreation  

Total  

1  00.0 

IOO.O 

IOO.O 

Subsequent  investigations  in  the  United  States  have  confirmed 
in  a  general  way  the  conclusions  of  Engel,  but  the  correspondence 
is  not  exact,  as  will  be  seen  from  Table  II  (page  119),  from  the 
reports  of  the  United  States  Bureau  of  Labor,  summarizing  the 
expenditure  of  over  two  thousand  families  in  1891  and  over  eleven 
thousand  in  1903. 

A  recent  careful  study  of  two  hundred  families  in  New  York 
gives  the  following  division  of  expenditures  :  — 


BRANCH  OF  EXPENDITURE 

AMOUNT  SPENT 

PER  CENT  or  TOTAL 

Food  

$367  A2 

A.1  ± 

Rent  

Clothing  

88  4? 

10  6 

Light  and  Fuel  

42  J.6 

C    T 

Insurance  

12  1Z 

7  O 

Sundries  

147.31 

17.6 

Total  

8*6  2? 

IOO  O 

CONSUMPTION 


The  author  of  this  study  comes  to  the  conclusion  that  a  "fair  liv- 
ing wage  for  a  workingman's  family  of  average  size  in  New  York 
City  should  be  at  least  $728  a  year,  or  a  steady  income  of  $14. 

TABLE  II 

EXPENDITURES  OF  AMERICAN  FAMILIES  INVESTIGATED  BY  THE 
UNITED  STATES  BUREAU  OF  LABOR 

(From  the  Seventh  [1891]  and  Eighteenth  Annual  Reports  [1903]) 


PER  CENT  OF  TOTAL  EXPENDITU»B 

Food 

Clothing 

Rent 

Fuel  and 

Miscella- 

Light 

neous 

1891 

1003 

1891 

1903 

1891 

1003 

1891 

1003 

1891 

1003 

Under  $200  

49.6 

5°-9 

12.8 

8.7 

15-5 

16.9 

8.1 

8.0 

14.0 

15-6 

$200     or     under 

$?oo  .  .          .  .  • 

4.4.3 

47.7 

14.3 

8.7 

14.7 

18.0 

7.6 

7.3 

IO  2 

18.8 

wsy*" 

$300     or     under 

H-T-O 

*T/  "O 

*t*  o 

/ 

**T*  / 

/ 

/ 

iy..* 

$400          

4C  6 

48    I 

I4.I 

IO.O 

1C  o 

18  7 

7  O 

71 

18  \ 

16.1 

$400     or     under 

o*** 

^"*-  " 

**T* 

ij.w 

*"•/ 

/•" 

•* 

10.3 

Ss;oo 

4C..I 

46  o 

14.4 

1  1.  4 

1C.  -I 

18.6 

6.6 

67 

18.6 

i6<; 

wyw  •  • 

$500     or     under 

1O  •* 

t"-y 

*T't 

•  "*T 

^J'O 

"•/ 

•v»3 

Sooo          -     .  • 

43-8 

46.2 

IS-3 

I2.O 

15-2 

18.4 

6.6 

6.2 

19.1 

17.2 

$600     or     under 

STOO 

A.I   2 

±1  C. 

le.o 

12  O 

jc  e 

18."; 

e  0 

c.8 

21.6 

IO  4 

V/vw 

$700     or     under 

41  •* 

too 

*o-y 

i^.y 

1  jO 

**-*o 

J'V 

J  " 

iy.^ 

$800  

*8  Q 

4.1  4. 

16.3 

ia.c 

ic  6 

18.1 

e.'i 

C.5 

27.  0 

21.6 

$800     or     under 

sr**jr 

41  .-4 

*v*o 

*O'J 

*j-" 

J'O 

JO 

o  y 

$900  

38.1 

41.4 

J5-1 

13-6 

16.1 

17.1 

5-3 

5-° 

25-5 

23.0 

$900     or     under 

$1000 

34-3 

39-9 

1  6.8 

14.4 

14.9 

17.6 

4-7 

5-° 

29.1 

23.2 

$1000    or    under 

$1  IOO                   .  . 

34-7 

38.8 

'7-5 

i5-r 

IS-1 

17-5 

4-5 

4-9 

28.1 

23-7 

$i  100    or    under 

$  i  200    

70    7 

3.7  7 

16  c 

14  0 

12.2 

16.6 

?.O 

4-7 

*6.7 

26.1 

$1200  or  over  ..  . 

J^'l 

28.6 

jl  •  1 
36.5 

»w*3 

IS-7 

*H-y 
IS-7 

12.6 

17.4 

o  y 

3-° 

*?•  / 
S-o 

o    / 
40.1 

25-4 

All  

41.1 

43-  1 

15-3 

13-0 

IS-I 

18.1 

5-9 

5-7 

22.7 

20.1 

120  OUTLINES   OF   ECONOMICS 

a  week.  Making  allowance  for  a  larger  proportion  of  surplus 
than  was  found  in  these  families,  which  is  necessary  to  provide 
adequately  for  the  future,  the  income  should  be  somewhat  larger 
than  this;  that  is,  from  $800  to  $900  a  year."  l 

QUESTIONS  AND  EXERCISES 

1.  If  you  had  four  sacks  of  corn  all  alike,  could  you  tell  which  is  the 
marginal  one  ? 

2.  If  an  individual  estimates  his  present  wants  as  10,  8,  6,  3,  i,  and  his 
future  wants  as  equivalent  to  the  present  value  of  9,  7,  5,  2,  o,  and  if  he  has 
$9,  and  if  each  want  is  satisfied  with  $i,  how  many  dollars  will  he  save? 

3.  Give  as  many  expressions  as  possible  that  are  equivalent  to  the  term 
"subjective  value." 

4.  Comment  on  the  following :   "  Doubtless  the  best  thing  to  do  about  them 
(the  spendthrifts)  is  to  do  nothing  —  not  even  to  worry  about  their  waste 
of  money.     Their  waste  of  money,  in  fact,  is  the  least  silly  thing  they  do,  for 
the  money  is  in  constant  flux  and  serves  its  purpose."     World's  Work,  June, 
1906,  p.  7597. 

5.  Comment  on  the  following  words  of  Adam  Smith:    "Nothing  is  more 
useful  than  water ;  but  it  will  purchase  scarce  anything ;  scarce  anything  can 
be  had  in  exchange  for  it.     A  diamond,  on  the  contrary,  has  scarce  any  value 
in  use,  but  a  very  great  quantity  of  goods  may  frequently  be  had  in  exchange 
for  it."     Wealth  of  Nations,  Book  I,  Chap.  IV. 

6.  Point  out  the  differences  in  the  tables  of  consumption  statistics  quoted 
in  the  text. 

REFERENCES 

BOHM-BAWERK,  E.  VON.     Positive  Theory  of  Capital,  Book  III,  Chaps.  3 

and  4. 
CARVER,   T.   N.     "How    Ought    Wealth    to   be   Distributed?"     Atlantic 

Monthly,  1906,  Vol.  97,  p.  727. 
DEVINE,  E.  T.     Economics,  Chaps.  V  and  VI. 
HOBSON,  J.  A.     The  Social  Problem,  Book  II,  Chap.  VII. 
JEVONS,  H.  S.     Essays  in  Economics,  Chaps.  II  and  III. 
KELLEY,  F.     "  Aims  and  Principles  of  the  Consumers'  League."     American 

Journal  of  Sociology,  Vol.  V,  p.  289. 

MARSHALL,  ALFRED.     Principles  of  Economics,  Book  III. 
MAYO-SMITH,  RICHMOND.     Statistics  and  Economics,  Book  I,  Chap.  II. 
MORE,  L.  B.     Wage-Earners'  Budgets. 
ROWNTREE,  B.  S.     Poverty,  Chaps.  VI,  VII,  and  VIII. 
SMART,  WILLIAM.     Introduction  to  the  Theory  of  Value,  Chaps.  I  to  VI. 
Eighteenth  Annual  Report  of  the  United  States  Bureau  of  Labor. 

1  More,  Wage-Earners'  Budgets,  New  York,  1907,  pp.  208  and  269. 


PART   III 
PRODUCTION 

CHAPTER   IX 
PRODUCTION 

Production  Defined.  — Man  creates  no  new  matter.  Neither 
the  farmer  nor  the  merchant  adds  one  atom  to  the  existing  material 
of  the  earth.  Yet  they  are  both  properly  called  producers  because 
they  increase  our  supply  of  economic  utilities.  Production,  then, 
means  the  creation  of  economic  utilities  by  the  application  of 
man's  mental  and  physical  powers  to  the  materials  of  nature. 
The  act  of  production  can  be  reduced  to  the  following  three  opera- 
tions: (i)  changing  the  form  of  things,  (2)  changing  their  place, 
and  (3)  keeping  them  until  such  times  as  they  are  wanted ;  in  other 
words,  production  adds  to  the  materials  of  nature,  form  utilities, 
lime  utilities,  and  place  utilities.  It  has  seemed  to  some  that  the 
farmer  is  more  truly  a  producer  than  the  manufacturer,  and  the 
manufacturer  than  the  merchant;  but  such  is  not  at  all  the  case. 
All  of  these  industrial  classes  help  at  some  stage  in  the  process 
of  getting  the  materials  of  nature  ready  for  consumption.  The 
miner  gets  iron  ore  from  the  ground,  the  manufacturer  trans- 
forms it  into  stoves,  the  railway  company  transports  them,  and 
the  merchant  keeps  them  until  they  are  wanted.  One  stage  is  as 
essential  as  another  if  wants  for  stoves  are  to  be  satisfied.  It 
may  well  happen  that  the  utilities  produced  by  the  merchant 
could  be  produced  with  a  smaller  expenditure  of  economic  force, 
and  that  by  a  better  organization  of  the  factors  of  production  saving 
could  be  effected;  or  it  may  be  that  at  times  the  merchant  has 
been  able  to  secure  a  larger  return  for  a  given  effort  than  the 
farmer,  but  this  is  no  justification  whatever  for  the  popular 
impression  that  he  is  not  a  productive  worker. 


122  OUTLINES   OF   ECONOMICS 

Factors  of  Production.  —  It  has  been  customary  to  speak  of 
three  factors  of  production  —  nature,  labor,  and  capital.  Under 
nature  are  included  all  forces  external  to  man,  as  the  wind,  the 
movement  of  water,  attraction  of  gravitation,  cohesion,  etc.  Fre- 
quently these  things  furnished  by  nature  are  called  simply  land, 
because,  of  what  belongs  to  external  nature,  it  is  with  land  that 
we  have  principally  to  do  in  political  economy. 

Labor,  as  a  factor  of  production,  includes  human  activities  of 
every  sort,  intellectual  as  well  as  physical,  which  have  economic 
significance.  We  might  better,  perhaps,  substitute  man  for  labor 
as  the  second  factor.  Labor  is  supplied  by  human  beings  and  is 
different  from  material  goods  because  it  is  always  connected  with 
a  personality.  Moral  and  intellectual  qualities  increase  its  pro- 
ductiveness. Temperance,  trustworthiness,  skill,  alertness,  quick 
perception,  a  comprehensive  mental  grasp,  —  all  these  and  other 
qualities  belonging  to  the  soul  of  man  are  of  paramount  impor- 
tance. Man's  mere  physical  strength  in  itself  is  a  poor  thing, 
being  surpassed  by  that  of  the  lower  animals,  but  man  is  far  more 
productive,  and  even  as  a  slave  sold  for  more  than  the  lower 
animals. 

Man  can  get  but  little  from  nature  with  his  unaided  hands.  The 
instruments  which  assist  him,  as  we  have  seen,  are  called  capital; 
in  other  words,  capital  is  every  product  which  is  used  or  held  for 
the  purpose  of  producing  or  acquiring  wealth.  By  this  definition, 
land  is  evidently  excluded  from  the  category.  The  nation's  capital, 
then,  consists  of  tools,  machinery,  business  buildings,  transporta- 
tion systems,  raw  material,  etc.  We  may  here  again  caution  the 
reader  against  confusing  these  concrete  goods  with  their  value. 
Capital  cannot  be  looked  upon  as  an  independent  factor  of  produc- 
tion, since  it  is  derived  from  the  labor  of  man  applied  to  nature. 
This  fact  has  led  some  persons  to  say  that  capital  is  simply  stored- 
up  labor,  but  this  overlooks  the  important  element  of  time  re- 
quired for  production  with  the  aid  of  capital.  When  we  say  that 
to  print  a  book  according  to  present-day  methods  requires  the  co- 
operation of  labor  and  capital,  we  do  not  deny  that  the  type-setting 
machines  and  printing  presses  which  are  used  are  themselves  the 
product  of  other  kinds  of  labor.  To  substitute  capital  for  labor 


PRODUCTION 


I23 


may  seem  to  be  simply  substituting  one  kind  of  labor  for  another. 
But  a  long  time  elapses  between  the  digging  of  the  iron  ore  and  the 
actual  using  of  the  machines  in  printing.  Capitalistic  production, 
as  distinct  from  simple  hand  labor,  is  merely  a  different  method  — 
a  roundabout  method  —  of  applying  human  labor  to  the  materials 
of  nature.  It  is  this  time  element  which  gives  rise  to  the  problem 
of  interest  to  be  discussed  in  a  later  chapter. 

"  Capital  is  an  intermediate  product  of  nature  and  labour,  nothing  more. 
Its  own  origin,  its  existence,  its  subsequent  action,  are  nothing  but  stages  in 
the  continuous  working  of  the  true  elements,  nature  and  labour.  They,  and 
they  alone,  do  everything  from  beginning  to  end  in  bringing  consumption 
goods  into  existence.  The  only  distinction  is  that  sometimes  they  do  it  all 
at  once,  sometimes  by  several  stages.  In  the  latter  case  the  completion  of 
each  stage  is  marked  outwardly  by  the  appearance  of  a  fore-product  or  inter- 
mediate product,  and  capital  has  emerged.  But,  let  me  ask,  is  a  thing  any 
the  less  the  work  of  its  author  that  it  is  not  produced  all  at  once,  but  in  in- 
stallments? If  to-day,  by  allying  my  labour  with  natural  powers,  I  make 
bricks  out  of  clay,  and  to-morrow,  by  allying  my  labour  with  natural  gifts, 
I  obtain  lime,  and  the  day  after  make  mortar  and  so  construct  a  wall,  can  it 
be  said  of  any  part  of  the  wall  that  I  and  the  natural  powers  have  not  made  it  ? 
Again,  before  a  lengthy  piece  of  work,  such  as  the  building  of  a  house,  is 
quite  finished,  it  must  naturally  be  at  one  time  a  fourth  finished,  then  a  half 
finished,  then  three  quarters  finished.  What,  now,  would  be  said  if  one  were 
to  describe  these  inevitable  stages  of  the  work  as  independent  requisites  of 
house-building,  and  maintain  that,  for  the  building  of  a  house,  we  require, 
besides  building  materials  and  labour,  a  quarter-finished  house,  a  half-finished 
house,  a  three-quarters  finished  house  ?  In  form  perhaps  it  is  less  striking, 
but  in  effect  it  is  not  a  whit  more  correct,  to  elevate  those  intermediate  steps 
in  the  progress  of  the  work,  which  outwardly  take  the  shape  of  capital,  into 
an  independent  agent  of  production  by  the  side  of  nature  and  labour."  * 

It  has  been  customary  to  distinguish  fixed  capital,  which  lasts 
for  a  succession  of  operations,  and  only  a  part  of  the  value  of  which 
passes  over  into  the  product  with  each  use,  from  circulating  capital, 
which  is  used  up  in  one  act  of  production.  Coal  used  in  a  loco- 
motive is  an  example  of  circulating  capital;  the  car  in  which  the 
coal  is  hauled  is  fixed  capital.  The  difference  is  one  of  degree  only. 

Saving  and  Capital  Formation.  —  From  the  individual  stand- 
point, saving  means  the  postponement  of  consumption.  To  lend 

1  Bohm-Bawerk,  Positive  Theory  of  Capital  (trans,  by  W.  Smart),  p.  96. 


124  OUTLINES   OF  ECONOMICS 

to  another,  and  thus  secure  a  claim  on  his  services  for  the  future,  is 
an  act  of  individual  saving,  but  this  does  not  necessarily  result  in 
saving  from  the  social  standpoint.  An  act  can  be  termed  social 
saving  only  when  the  total  social  income  in  the  future  will  be  in- 
creased thereby.  It  is  conceivable  that  this  might  take  the  form 
of  merely  hoarding  up  finished  consumption  goods  in  anticipation 
of  a  famine,  but  that  is  not  the  kind  of  saving  that  is  typical  of 
modern  industrial  nations.  It  is  true  that  we  frequently  produce 
durable  consumption  goods  which  will  be  used  for  a  long  time  in 
the  future.  The  construction  of  a  public  library  building  in  part 
involves  social  saving.  But  true  social  saving  may  also  consist 
in  bettering  the  industrial  equipment  of  society.  To  provide  more 
and  better  machines  it  is  necessary  to  use  some  of  the  labor  which 
might  be  used  to  increase  our  present  income.  If  all  of  the  labor 
now  used  in  the  construction  of  new  milling  machinery,  ovens,  etc., 
were  employed  in  turning  into  bread  all  of  the  flour  we  now  have 
on  hand,  we  could  doubtless  greatly  increase  temporarily  our 
present  income  in  bread,  but  it  would  be  at  the  expense  of  the 
future  income.  Thus  the  saving  which  results  in  the  formation 
of  social  capital  requires  two  things:  (i)  abstaining  from  the 
largest  possible  income  to-day,  and  (2)  using  part  of  our  labor  in 
bettering  the  industrial  equipment.  Individual  saving,  however, 
itself  commonly  results  in  social  saving  also,  as  will  be  explained 
in  a  later  chapter. 

Production  and   Sacrifice. — Over  against  the  enjoyment  re- 
sulting from  wealth  consumption   lies  the  discomfort  of  wealth 

production.  Enjoyment,  we  have 
seen,  grows  less  and  less  as  the 
consumption  of  a  particular  good 
is  continued,  but  the  irksomeness 
of  producing  it,  on  the  contrary, 
grows  greater  and  greater  the 

0  x  longer  labor  is  continued.      Let 

FIG.  i 

us   take  the  case  of    Robinson 

Crusoe  picking  berries.  We  may  represent  the  diminishing 
utility  of  the  berries  to  him  by  the  line  ab  (Fig.  i),  and  the  in- 
creasing irksomeness  of  picking  them  by  the  line  cd.  He  would 


PRODUCTION 


I25 


not  pick  more  than  Ox,  because  the  xih  berry  costs  him  just  as 
much  pain  as  it  yields  him  pleasure,  and  any  further  continuance 
of  gathering  fruit  would  result  in  an  excess  of  pain.  The  degree  of 
utility  represented  by  mx,  then,  represents  at  the  moment  that  the 
xih  berry  is  picked  and  eaten,  both  the  marginal  utility  and  the 
marginal  disutility,  or  marginal  pain  or  sacrifice. 

Each  of  us  is  continually  making  such  comparisons  —  balancing 
the  pleasure  of  further  consumption  against  the  pain  of  further 
production.  Many  persons  who  are  working  eight  or  ten  hours  a 
day  could  increase  their  income  somewhat  by  working  twelve 
hours,  but  the  additional  discomfort  is  greater  in  their  estimation 
than  the  additional  fruits  of  their  labor  would  be  worth.  To  be 
sure,  much  of  our  economic  action  goes  on  unconsciously.  We 
accept  a  position,  considering  its  advantages  and  its  disadvantages 
in  a  general  way  as  compared  with  the  income  it  yields,  but  once 
we  enter  upon  the  work,  we  accept  the  daily  grind  as  inevitable, 
and,  in  spending  our  income,  think  not  of  the  pain  it  causes 
us,  but  simply  of  how  we  can  get  the  maximum  satisfaction 
from  it. 

In  discussing  future  wants  we  saw  that  postponing  the  con- 
sumption of  goods  from  the  present  to  the  future  began  to  be  irk- 
some only  after  a  certain  amount  of  goods  had  been  saved.  Under 
present  methods  of  production,  it  has  just  been  explained,  a  large 
amount  of  this  postponement  of  consumption  is  required.  Ma- 
chines must  be  made,  and  the  result  of  this  labor  cannot  be  enjoyed 
until  these  machines  have  been  used  up  in  making  finished 
products.  This  means  that  some  one  must  wait  for  the  result,  and 
in  many  cases  this  is  irksome.  Thus  production  may  require,  in 
addition  to  the  pain  of  labor,  the  sacrifice  of  irksome  -waiting  or 
abstinence.  This  is  a  point  which  will  be  discussed  further  in  the 
chapter  on  interest. 

Cost  of  Production  and  Expense  of  Production.  — The  preceding 
paragraphs  explain  the  most  fundamental  sense  in  which  the  term 
"cost  of  production  "  is  used,  i.e.  (i)  the  subjective  cost  of  painful 
labor  or  irksome  waiting.  But  (2)  the  phrase  is  commonly  used  to 
refer  to  the  expense  of  production,  that  is,  the  number  of  dollars' 
worth  of  labor  and  capital  goods  spent  in  getting  an  article  on  the 


126  OUTLINES   OF   ECONOMICS 

market.  (3)  A  third  meaning  is  also  found,  which  may  be  termed 
opportunity  cost.  Let  us  say  that  a  person  is  confronted  by  the 
alternative  of  engaging  in  either  of  two  occupations.  He  may  be 
either  a  lawyer  or  a  merchant,  but  he  has  not  the  time  to  be  both. 
If  he  chooses  to  be  a  lawyer,  he  sacrifices  his  opportunity  of  being 
a  merchant.  In  some  cases  this  form  of  sacrifice  is  not  easy  to  dis- 
tinguish from  the  first.  If  a  man  is  hesitating  whether  to  accept  a 
position  requiring  nine  hours'  work  per  day  or  one  requiring  ten 
hours,  shall  we  think  of  him  as  considering  the  irksomeness  of  the 
tenth  hour,  or  the  leisure  which  he  would  be  sacrificing?  But 
where  the  opportunity  that  is  sacrificed  is  an  occupation  or  busi- 
ness, this  "opportunity-cost"  is  simply  one  way  of  looking  at 
the  fact  that  we  aim  to  get  the  greatest  possible  return  for  our 
labor. 

Organization  of  the  Productive  Factors.  —  The  three  factors, 
land,  labor,  and  capital,  must  be  brought  together  for  purposes  of 
production.  In  the  case  of  many  farmers  and  small-scale  manufac- 
turers, all  three  are  furnished  by  the  same  person,  but  under  our 
system  of  private  property,  a  marked  differentiation  of  ownership 
takes  place  as  industrial  development  becomes  more  complex. 
In  a  large-scale  establishment  it  is  the  exceptional  case  where  the 
majority  of  the  laborers  have  any  share  in  the  ownership  of  the 
capital,  but  generally  the  owners  of  the  capital  are  also  the  owners 
of  the  land.  In  American  agriculture,  ownership  of  the  land  and 
the  capital  by  the  same  person  is  also  widespread,  but  in  England 
at  the  present  time  it  is  the  rule  that  the  landowner  and  farmer  are 
different  persons.  On  the  other  hand,  factories  are  frequently 
built  upon  leased  ground,  and  much  land  is  farmed  in  America  by 
tenants  who  furnish  their  own  capital.  Separation  in  the  owner- 
ship of  the  productive  factors  and  accurate  accounting  make  neces- 
sary a  distinct  valuation  of  the  services  of  each  one  of  the  factors. 

The  Entrepreneur,  or  Undertaker.  —  The  one  who  manages  a 
business  for  himself  was  formerly  called  an  undertaker,  or  ad- 
venturer, but  the  first  word  has  been  appropriated  by  one  small 
class  of  business  men,  and  the  latter  has  acquired  a  new  meaning, 
carrying  with  it  the  implication  of  rashness  and  even  dishonesty. 
We  have  consequently  been  obliged  to  resort  to  the  French  language 


PRODUCTION 


127 


for  a  word  to  designate  the  person  who  organizes  and  directs  the 
productive  factors,  and  we  call  such  a  one  an  entrepreneur;  but 
recently  the  term  "  undertaker  "  has  been  more  frequently  em- 
ployed with  this  broad  general  meaning. 

The  function  of  the  entrepreneur  has  become  such  an  important 
one  in  modern  society  that  it  is  often  convenient  to  regard  him 
as  a  fourth  factor  in  production,  distinct  from  other  classes  of 
laborers.  He  has  been  well  called  a  captain  of  industry,  for  he 
commands  the  industrial  forces,  and  upon  him  more  than  any 
one  else  rests  the  responsibility  of  success  or  failure.  A  business 
which  has  achieved  magnificent  success  often  becomes  bankrupt 
when,  owing  to  death  or  other  causes,  an  unfortunate  change  in 
the  entrepreneur  is  made.  The  prosperity  of  an  entire  town  has 
sometimes  been  observed  to  depend  upon  half  a  dozen  shrewd 
captains  of  industry. 

Division  of  Labor.  —  A  characteristic  feature  of  the  organiza- 
tion of  the  factors  is  what  is  commonly  called  a  division  of  labor, 
but  this  term  suggests  a  number  of  related  ideas  which  must  be 
distinguished,  (i)  We  may  mention  first  a  separation  of  occupa- 
tions, each  one  being  independent  of  the  other,  as  is  shown,  for 
example,  in  the  splitting  up  of  medical  work  into  various  special- 
ties, and  again,  entirely  new  occupations  are  continually  appearing. 
(2)  We  also  find  production  divided  into  stages,  each  one  giving 
rise  to  a  commercial  product,  but  not  to  a  finished  consumption 
good.  This  becomes  clear  if  we  think  of  the  history  of  almost  any 
article  of  daily  use :  the  making  of  bread  presupposes  the  flour  and 
wheat  stages.  (3)  We  have  in  the  third  place  what  is  most  com- 
monly referred  to  by  the  term  "  division  of  labor,"  where  the  pro- 
ductive process  is  divided  into  minute  parts,  and  one  part  given 
to  each  laborer.  The  organization  of  a  cotton  mill  affords  an 
excellent  illustration :  — 

In  cotton  mills,  as  in  all  other  textile  mills,  there  are  men  of  skill  and  ex- 
perience who  superintend  or  oversee  the  work  in  various  buildings  and  in 
the  rooms  and  yards.  These  supervisory  employees  have  assistants,  and 
the  division  of  superintendence  is  carried  down  to  the  sections  of  rooms,  so 
that  all  sections  have  their  supervisors,  known  variously  as  section  bosses, 
section  hands,  section  girls,  and  third  hands.  The  following  list  of  occupa- 


128  OUTLINES   OF  ECONOMICS 

tions  will  indicate  the  extent  to  which  division  of  labor  is  carried  in  this 
industry:  alley  boys  (or  girls);  bundle  boys;  filling  and  roving  carriers; 
belt  makers,  blacksmiths,  carpenters,  machinists,  masons,  painters,  steam 
fitters,  and  other  mechanics,  including  sometimes  electricians  and  battery- 
men  ;  roll  coverers ;  helpers ;  laborers  (unskilled) ;  bale  openers ;  picker 
hands  or  cotton  shakers;  lap  tenders;  card  brushers;  first  and  second 
breaker  hands;  finisher  pickers;  card  boys;  card  hands;  waste  hands; 
wastemen;  card  clothiers;  card  strippers;  card  grinders;  combers;  lap- 
head  hands;  doublers;  drawing -frame  tenders ;  rail  way -head  tenders;  slub- 
bers; speeders,  fly-frame  tenders;  jack  tenders;  rovers;  spinners;  bobbin 
boys;  yarn  pourers;  piecer  and  doffer;  back  boy;  band  boys;  doublers 
and  twisters ;  winders ;  yarn  untanglers ;  spool  boys,  white  spoolers ;  warp- 
ers ;  slasher  tenders ;  size  makers ;  reel  hands ;  dye-house  hands  (with  further 
subdivisions) ;  beamers  and  splitters ;  beam  carriers ;  warp  drawers ;  harness 
menders;  harness  brushers;  handers-in;  twisters-in;  loom  fixer;  pattern 
makers;  putters-up  oi^amples;  cloth  weavers;  weavers  of  designs;  yarn 
carriers ;  smash  piecers ;  spare  weavers ;  inspectors ;  trimmers.  The  finish- 
ing of  the  cloth  is  a  separate  industry.1 

This  form  of  the  division  of  labor  may  also  exist  without  the 
use  of  complex  machinery,  as  in  the  slaughtering  and  meat- 
packing industry. 

"It  would  be  difficult  to  find  another  industry  where  division  of  labor  has 
been  so  ingeniously  and  microscopically  worked  out.  The  animal  has  been 
surveyed  and  laid  off  like  a  map ;  and  the  men  have  been  classified  in  over 
thirty  specialties  and  twenty  rates  of  pay  from  16  cents  to  50  cents  an  hour. 
The  5o-cent  man  is  restricted  to  using  the  knife  on  the  most  delicate  parts  of 
the  hide  (floorman)  or  to  using  the  ax  in  splitting  the  backbone  (splitter) ; 
and  wherever  a  less  skilled  man  can  be  slipped  in  at  18  cents,  i8|  cents,  20 
cents,  21  cents,  22^  cents,  24  cents,  25  cents,  and  so  on,  a  place  is  made  for 
him  and  an  occupation  mapped  out.  In  working  on  the  hide  alone  there  are 
nine  positions  at  eight  different  rates  of  pay.  A  2o-cent  man  pulls  off  the 
tail,  a  22^  cent  man  pounds  off  another  part  where  the  hide  separates  readily, 
and  the  knife  of  the  4o-cent  man  cuts  a  different  texture  and  has  a  different 
"feel"  from  that  of  the  5o-cent  man.  Skill  has  become  specialized  to  fit  the 
anatomy."  * 

Advantages  of  Division  of  Labor.  —  The  advantages  of  a  divi- 
sion of  labor  have  been  enumerated  as  follows:  (i)  A  gain  of  time. 
A  change  of  operations  costs  time.  Less  time  is  also  consumed  in 

1  From  the  Glossary  of  Occupations  in  the  volume  on  Employees  and  Wages. 
Twelfth  Census,  Special  Reports,   1903. 

2  Commons,  Trade  Unionism  and  Labor  Problems ,  p.  224,  in  a  chapter  appear- 
ing originally  in  the  Quarterly  Journal  of  Economics,  Vol.  XIX,  p.  i. 


PRODUCTION 


129 


learning  one's  business,  as  the  labor  of  each  is  more  simple. 
(2)  Greater  skill  is  acquired,  because  each  person  confines  himself 
to  one  operation.  (3)  Labor  is  used  more  advantageously. 
Some  parts  of  an  industrial  process  can  be  performed  by  a  weak 
person,  others  require  unusual  physical  strength;  some  require 
extraordinary  intelligence,  some  can  be  performed  by  a  man  of 
very  ordinary  intellectual  powers,  and  so  on  indefinitely.  Each 
one  is  so  employed  that  his  entire  power  is  utilized,  and  work  is 
found  for  all,  young  and  old,  weak  and  strong,  stupid  and  intel- 
lectually gifted.  (4)  Inventions  are  more  frequent,  because  the 
industrial  processes  are  so  divided  that  it  is  easy  to  see  just 
where  an  improvement  is  possible.  Besides  this,  when  a  per- 
son is  exclusively  engaged  in  one  simple  operation,  he  often  sees 
how  the  appliances  he  uses  could  be  improved.  Workmen  have 
made  many  important  inventions.  (5)  Capital  is  better  utilized. 
Each  workman  uses  one  set  of  tools,  or  one  part  of  a  set,  and  keeps 
that  employed  all  the  time.  When  each  workman  does  many 
things,  he  has  many  tools,  and  some  are  always  idle.  (6)  Finally, 
where  the  division  of  labor  results  in  the  simplification  of  opera- 
tions, it  facilitates  the  substitution  of  machinery  with  mechanical 
power  in  place  of  direct  human  labor.  "It  is  the  largeness  of 
markets,  the  increased  demand  for  great  numbers  of  things  of 
the  same  kind,  and  in  some  cases  of  things  made  with  great  accu- 
racy, that  leads  to  subdivision  of  labor;  the  chief  effect  of  the  im- 
provement of  machinery  is  to  cheapen  and  make  more  accurate 
the  work  which  would  anyhow  have  been  subdivided."  l 

Effects  upon  the  Worker.  —  The  effect  of  the  introduction  of 
machinery  upon  wages  will  be  discussed  in  a  later  chapter,  but 
here  some  attention  should  be  given  to  the  effect  of  division  of 
labor  and  machinery  upon  the  life  of  the  worker.  It  is  frequently 
said  that  when  labor  is  rendered  simple  it  loses  both  its  attractive- 
ness and  its  educational  value.  A  man  can  like  his  work  when 
he  manufactures  a  whole  watch,  bearing  the  impress  of  care  and 
skill,  but  who  can  like  the  mere  routine  of  feeding  material  into 
some  machine  ?  A  workingman  becomes  a  mere  cog  in  a  great 
mechanism,  driven  at  a  certain  speed,  day  after  day,  with  no 

'Marshall,  Principles  of  Economics,  4th  ed.,  p.  334. 
K 


130  OUTLINES   OF  ECONOMICS 

further  interest  in  the  result  of  his  labor  than  that  it  is  the  source 
of  his  daily  wage.  But  much  may  be  said  on  the  other  side.  To  a 
large  extent  the  heaviest  labor  is  done  with  mechanical  appliances, 
and  those  movements  which  are  very  simple  and  regular  are  precisely 
the  ones  which  are  likely  to  be  taken  over  by  machinery,  leaving 
to  human  beings  the  work  which  requires  intelligence  and  skill. 

"Looked  at  broadly,  is  the  average  work  of  a  laborer  in  a  machine  industry 
less  dignified,  less  agreeable,  less  humanizing  than  it  was  before  the  industry 
reached  the  machine  stage  ?  From  the  nature  of  the  question,  it  is  danger- 
ous to  dogmatize,  because  neither  the  affirmative  nor  the  negative  is  capable 
of  being  demonstrated.  The  negative  view  seems  to  rest  mainly  upon  the 
assumption  that  it  is  more  dignified  to  be  occupied  with  a  great  many  purely 
mechanical  operations  than  with  a  very  few.  The  old-fashioned  shoe- 
maker, for  example,  was  largely  occupied  with  purely  mechanical  opera- 
tions, most  of  them  of  a  very  elementary  nature,  such  as  a  machine  can  do 
quite  as  well  as  a  man.  Each  of  these  operations  required  great  concen- 
tration of  attention,  leaving  him  very  little  opportunity  for  other  forms  of 
mental  activity.  He  was  the  slave  of  each  particular  task  as  truly  as  a 
modern  machine  worker  can  be  said  to  be  the  slave  of  his  single  task. 
But  the  old-fashioned  shoemaker  had  to  turn  from  one  kind  of  work  to  an- 
other. This  increased  the  difficulty,  and,  on  the  whole,  required  of  him  a 
greater  amount  of  concentration  than  is  now  required  of  the  operator  of  a 
machine.  The  latter,  who  has  but  one  routine  task  to  learn,  learns  it 
easily,  and  can  carry  it  out  without  very  intense  concentration  of  mind. 
His  mind,  therefore,  would  seem  to  be  freer  than  that  of  the  old  hand 
worker,  though  there  was  more  variety  to  the  work  of  the  latter.  Whether 
this  greater  variety  is  to  his  advantage  or  disadvantage  would  be  difficult 
to  determine  offhand.  It  looks  as  though  the  operator  of  a  machine  in  a 
shoe  factory,  being  relieved  of  the  necessity  of  acquiring  several  forms  of 
specialized  manual  dexterity,  would  be  in  a  better  position  for  free  mental 
activity  than  the  old-fashioned  shoemaker."  l 

It  seems  that  those  who  declaim  against  factory  life  do  not  dis- 
tinguish those  things  which  are  temporary  and  those  things  which 
are  inherent  in  the  system.  Long  hours,  insanitary  conditions  of 
work,  and  frequent  industrial  accidents  need  not  be  inevitable  ac- 
companiments of  the  use  of  machinery.  It  is  the  efficiency  of 
machine  methods  that  makes  leisure  possible  for  the  workingmen, 
and  when  they  learn  to  use  that  leisure  sanely,  their  condition  will 

*T.  N.  Carver,  "Machinery  and  the  Laborers,"  Quarterly  Journal  of  Eco- 
nomics, February,  1908,  p.  230. 


PRODUCTION  I3I 

be  far  in  advance  of  what  it  could  be  under  more  primitive  methods 
of  production. 

The  charge  is  also  brought  against  machine  production  that  it 
is  antagonistic  to  the  development  of  art.  Machine  production 
means  uniform  production.  It  is  possible  that  a  growth  in  the 
desire  for  what  is  beautiful  rather  than  cheap  will  limit  the  use  of 
machinery  in  some  directions  (e.g.  we  may  insist  upon  more  hand 
work  in  the  making  of  furniture),  but  an  extensive  use  of  machinery 
will  always  be  necessary  as  a  servant  of  art,  and  that  in  two  ways: 
(i)  for  an  appreciation  of  art  there  must  be  leisure,  or  at  least 
leisurely  work,  and  without  machine  methods  this  is  not  possible 
for  the  masses;  (2)  there  is  much  work  that  is  preliminary  to  the 
work  of  the  artist,  and  that  can  be  done  by  machinery.  Will  a 
building  be  less  artistic  because  much  of  the  heavy  work  of  dress- 
ing the  stone  is  done  by  machinery? 

Territorial  Division  of  Labor.  —  The  concentration  of  a  certain 
industry  in  a  particular  region  is  often  called  the  territorial  division 
of  labor,  or  the  localization  of  industry.  Illustrations  are  seen  in 
the  prominence  of  the  boot  and  shoe  industry  in  Massachusetts; 
the  collar  and  cuff  manufacture  in  Troy,  New  York ;  oyster  can- 
ning in  Baltimore;  the  manufacture  of  gloves  in  Gloversville  and 
Johnstown,  New  York ;  of  coke  in  the  Connellsville  district, 
Pennsylvania;  of  brass  ware  in  Waterbury,  Connecticut;  of  carpets 
in  Philadelphia;  of  jewelry  in  Providence,  Rhode  Island.  Attleboro, 
and  North  Attleboro;  slaughtering  and  meat  packing  in  Chicago; 
the  manufacture  of  plated  and  britannia  ware  in  Meriden,  Con- 
necticut; and  the  manufacture  of  silk  in  Paterson,  New  Jersey. 
The  following  causes  of  localization  have  been  mentioned:  (i)  prox- 
imity to  raw  material,  (2)  accessibility  to  markets,  (3)  presence  of 
water  power,  (4)  favorable  climate,  (5)  availability  of  labor, 
(6)  availability  of  capital,  and  (7)  the  momentum  of  an  early  start. 
The  explanation  of  how  these  causes  have  operated  in  particular 
instances  is  left  as  an  exercise  for  the  student.1 

1  Consult  Hall,  "The  Localization  of  Industry,"  Census  Bulletin,  No.  244  (also 
found  in  Twelfth  Census,  Manufactures),  and  Ross,  "The  Localization  of 
Industry,"  Quarterly  Journal  of  Economics,  Vol.  X,  p.  247-  Also  the  Federal 
Census  of  Manufactures  for  1905,  Vol.  I,  Chap.  XII. 


132 


OUTLINES   OF  ECONOMICS 


Productive  Organization  of  the  American  People.  —  According 
to  the  Census  of  1900,  nearly  two  fifths  of  the  total  population  and 
about  one  half  of  the  population  ten  years  of  age  and  over  are 
engaged  in  gainful  occupations.  In  the  following  table  the  extent 
to  which  persons  in  each  age  group  are  gainfully  employed  is  shown 
for  each  sex :  — 

TABLE  I 

NUMBER  OF  MALES  AND  OF  FEMALES  OF  EACH  SPECIFIED  AGE  ENGAGED 
IN  GAINFUL  OCCUPATIONS  COMPARED  WITH  THE  TOTAL  NUMBER  OF 
THE  SAME  SEX  AND  AGE  : 


AGE  GROUPS 

MALES  10  YEARS  OF 
AGE  AND  OVER. 
PER  CENT  OF  TOTAL 
IN  EACH  GROUP 

FEMALES  10  YEARS  OF 
AGE  AND  OVER. 
PER  CENT  OF  TOTAL 
IN  EACH  GROUP 

10  to  15  years  

26  i 

IO  2 

1  6  to  20  years  

768 

12  1 

21  to  24  years  

m  i 

10  8 

2C  to  id.  vears  .  . 

06  i 

3S  to  44.  years  .  . 

96  6 

it  6 

45  to  54  years  

os  e 

14  7 

?  <j  to  64  vears  .  . 

no  o 

65  years  and  over. 

68  4 

Age  unknown  

TO  6 

2A  2 

Aggregate  ..  . 

80  o 

18  8 

The  fact  that  women  at  work  in  their  own  households  are  not 
counted  as  gainful  workers  is  apparent  from  this  table.  The 
effect  of  school  attendance  is  seen  in  earlier  age  groups.  In  the 
column  for  the  female  workers  the  effect  of  marriage  is  seen  in  the 
decline  in  the  percentages  after  twenty  years.  Old  age  makes  its 
influence  felt  in  both  columns. 

The  following  table  shows  the  distribution  of  the  gainful  workers 
among  the  five  main  classes  of  occupations.  The  most  striking 
facts  are  the  decline  in  the  relative  importance  of  agricultural  pur- 
suits and  the  increase  in  the  relative  importance  of  trade  and 
transportation :  — 

'  Twelfth  Census,  Special  Report  on  Occupations,  1904,  p.  cxviii. 


PRODUCTION 


TABLE   II 

DISTRIBUTION  BY  MAIN  CLASSES  OF  PERSONS  ENGAGED  IN  GAINFUL 
OCCUPATIONS  x 


IQOO 

1890 

1880 

Agricultural  pursuits              

If  7 

Professional  service  

A.  1 

A  O 

Domestic  and  personal  service  

IQ  2 

18  t 

IQ  6 

Trade  and  transportation     

16  4 

IA   1 

10  8 

Manufacturing  and  mechanical  pursuits.  . 

24.4 

24.4 

21.8 

IOO.O 

IOO.O 

IOO.O 

The  broad  territorial  division  of  labor  is  seen  when  these  per- 
centages are  given  separately  for  groups  of  states :  — 

TABLE   III 

PER  CENT  OF  GAINFUL  WORKERS  IN  EACH  CLASS  OF  OCCUPATIONS  BY 
GROUPS  OF  STATES:    1900  2 


AGRICULTURE 

PROFESSIONAL 
SERVICE 

DOMESTIC  AND 
PERSONAL 

TRADE  AND 
TRANSPOR- 
TATION 

FISHING 

MINING  AND 
QUARRYING 

MANUFACTURES 
PROPER 

North  Atlantic  

12.  C 

4.8 

21.6 

21.8 

O.7 

2.3 

l6.7 

South  Atlantic  

qo.8 

3.0 

20.  o 

IO.C 

0.6 

I.O 

14.1 

North  Central  . 

?6.6 

<r.O 

18.4 

17.4 

O.I 

1.7 

20.8 

South  Central  

67.4. 

2.Q 

1C.  2 

Q.I 

O.I 

I.O 

8.3 

Western  

27.  -z 

c.7 

21.8 

IQ.4 

o.s 

7.4 

17.  0 

In  Table  IV  the  various  occupations  differentiated  in  the  Census 
Report  on  Occupations  have  been  classified  somewhat  in  accord- 
ance with  their  natural  ranking,  the  amount  of  skill  they  require, 
and  the  educational  influence  which  they  exercise  over  the  people 
who  follow  them.  In  each  element  of  the  population  the  females 


1  Twelfth  Census  Special  Report  on  Occupations,  1004,  p.  btxxvi. 
*  Special  Report  on  Occupations,  1904,  pp.  xciv  and  cii. 


J34 


OUTLINES   OF  ECONOMICS 


are  found  to  a  larger  extent  than  the  males  in  the  lower  grades  of 
skill.  For  both  male  and  female  negroes,  the  percentage  of  those 
engaged  in  unskilled  labor  is  very  large.  For  the  other  elements 
of  the  population  there  is  an  upward  trend  out  of  this  lowest 

grade. 

• 

TABLE  IV 

PERCENTAGE  OF  NATIVE  AND  FOREIGN  BORN  ELEMENTS  AND  NEGROES 
ENGAGED  IN  THE  SPECIAL  GROUPS  OF  OCCUPATIONS  CLASSIFIED  BY 
SEX  :  1880,  1890,  AND  1900 


NATIVITY  AND  SEX 

YEAE 

PROPRIETARY 

PROFESSIONAL 

CLERICAL 

SKILLED 
LABOR 

FACTORY 
LABOR 

UNSKILLED 
LABOR 

Native  Born 
Males  

1880 

•3C   QI 

7.12 

d.2Q 

ii.  si; 

<;.8* 

-to.-io 

Native  Born 
Females  

1890 
1900 

1880 

35-82 

3I'4I 

-1.28 

3-74 
3-96 

7-<;4 

6-75 
9.00 

1.61 

J4-59 

15.20 

1.62 

6.26 
6-43 

20.65 

32.84 
34-oo 

66.30 

Foreign  Born 
Males  

1890 
1900 

1880 

7.72 
8.67 

27.81 

9-32 
12.50 

2.O2 

5-36 
12.50 

2.78 

2.IO 

2.83 

I7-S8 

23.40 
29.00 

I3-25 

52.10 
34-5° 

36.56 

Foreign  Born 
Females  

1890 
1900 

1880 

24.77 
23-36 

4.l6 

2-15 

2-45 
2.t;6 

4.18 
5-" 

.82 

19.98 
19-45 

1.58 

12.78 
14.19 

^o.  37 

36.14 

35-44 

60.  ?2 

Negroes 
Male  

1890 
1900 

1890 

7.08 
7-95 

26.65 

2.52 
2.94 

i.  20 

2-39 
4.70 

.•3Q 

1.82 
I.7I 

6.  07 

27.46 
30.18 

•2.  -27 

58.37 
52.52 

62.72 

Negroes 
Female  

1900 
1890 

25.98 

C.4.C 

«'*5 

,QO 

.46 

.08 

5-51 

3-92 

2.QI 

62.98 
OO.o6 

1900 

6.07 

1.19 

.12 

.04 

2.86 

89-72 

Prepared  by  Mr.  H.  J.  Dahl,  of  the  University  of  Wisconsin,  from  the  Reports  of  the 
Twelfth  Census,  and  from  Mr.  W.  C.  Hunt's  monograph,  entitled.  Workers  al  Gainful  Occu- 
pations, published  in  the  Bulletin  of  the  Department  of  Labor,  No.  n,  July,  1897. 


PRODUCTION 


QUESTIONS 


J35 


1.  Is  the  employee  in  a  planing  mill  in  a  worse  position  than  the  old-time 
carpenter  who  has  to  do  his  planing  by  hand  ? 

2.  Is  an  insurance  agent  a  producer  of  wealth? 

3.  What  would  happen  if  there  should  be  too  much  saving? 

4.  When  you  spend  money,  do  you  ordinarily  think  of  how  hard  you  had 
to  work  to  get  it? 

5.  Why  is  Massachusetts  the  center  of  the  boot  and  shoe  industry  ? 

REFERENCES 

CARVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  II. 

FISHER,  IRVING.     The  Nature  of  Capital  and  Income,  Chaps.  V  and  VI. 

HOBSON,  J.  A.     The  Social  Problem,  Book  II,  Chap.  II. 

MARSHALL,  ALFRED.     Principles  of  Economics,  Book  IV. 

VEBLEX,  T.  B.     The  Theory  of  Business  Enterprise,  Chaps.  II  and  IIL 

Valuable   collateral    reading  will   be   found   in   recent   bulletins  of  the 
Census  Bureau  describing  specific  branches  of  production. 


CHAPTER  X 
BUSINESS   ORGANIZATION 

THE  dominance  of  "  business"  in  our  present  social  economy  is 
so  familiar  and  commonplace  a  thing  that  we  are  apt  to  forget  its 
real  significance.  But  it  indicates,  as  nothing  else  does,  the 
cleavage  that  exists  in  modern  times  between  money  making  and 
the  other  things  of  life  —  between  exchange  economy  and  domes- 
tic economy.  Commerce  and  manufactures  have  each  in  turn 
been  brought  under  the  dominion  of  business  enterprise;  busi- 
ness methods  and  motives  are  also  of  the  first  importance  in 
agriculture,  although  in  this  last  field  production  for  domestic 
use  still  continues  and  promises  to  continue  hand  in  hand  with 
production  for  the  market. 

"Business"  means  profit  seeking.  It  does  not  cover  so  broad 
a  field  as  does  "production,"  nor  is  it  quite  the  same  thing  as 
"production  for  the  market."  Business  is  acquisitive  rather 
than  productive,  and  while  acquisition  usually  implies  produc- 
tion, this  is  not  invariably  the  case.  The  economic  world,  in  its 
business  aspect,  is  a  world  of  buying  and  selling  rather  than  of 
making  and  using  things;  it  is  a.world  in  which  prices,  expenses, 
debts  and  credits,  and  contractual  relations  are  the  dominating 
things  rather  than  the  technical  processes  of  production  or  the 
ultimate  costs  of  production  as  measured  in  human  effort  and 
sacrifice. 

The  Nature  of  Business  Units. — Under  competitive  conditions 
profit  seeking  involves  risk  taking.  The  business  world  is  made 
up  of  profit-seeking,  risk-taking  units,  —  entrepreneurial  units. 
We  are  apt  to  think  of  business  units  as  concrete  things,  com- 
posed of  individual  men  or  groups  of  men.  In  an  ultimate 
sense  this  is  true,  but  for  present  purposes  we  may  more  profit- 

136 


BUSINESS   ORGANIZATION 


137 


ably  view  business  units  as  abstract  things,  —  the  centers  or 
foci  of  the  contractual  and  other  legal  relations  that  bind  the 
business  world  together.  These  relations  are  recorded  and  stated 
more  or  less  fully  in  the  accounts  of  each  business  unit;  ulti- 
mately, however,  they  are  matters  of  legal  fact,  and,  as  we  shall 
see,  the  legal  aspect  and  the  accounting  aspect  of  these  relations 
are  not  always  identical. 

Without  entering  into  either  the  general  theory  or  the  details 
of  accounting,  we  may  note  that  the  simplest  general  way  in 
which  a  business  unit  can  be  described  by  its  accounts  is  by 
means  of  the  income  statement,  which  is  a  simple  record  of  money 
receipts  and  money  expenditures  during  a  given  period,  such  as 
a  month  or  a  year.  Of  more  significance,  however,  in  the  present 
connection,  is  the  balance  sheet,  which  is  the  statement  of  the 
assets  or  resources  and  the  liabilities  or  obligations  of  the  busi- 
ness unit  as  they  exist  at  a  particular  time.  The  income  state- 
ment is  a  historical  record,  the  balance  sheet  a  photographic 
snap-shot.1  The  following  is  a  simplified  form  of  balance  sheet 
for  a  small  manufacturing  establishment :  — 


ASSETS 

Land  and  buildings $190,000 

Machinery  and  fixtures.  .  .  50,000 
Raw  materials,  goods  in 

process,     and      finished 

goods  on  hand 60,000 

Accounts  receivable 8,000 

Cash  on  hand  and  in  banks  7,000 

Total  assets $315,000 


LIABILITIES 

Original  capital  invested.  $200,000 

Income  reinvested 60,000 

Accounts  payable 30,000 

Profits 25,000 


Total  liabilities $315,000 


The  itemized  assets  explain  themselves,  but  the  meaning  of 
the  various  liabilities  may  not  be  so  clear.  In  this  statement  all 
the  items  of  the  liabilities  except  "accounts  payable"  refer  to  the 
liabilities  of  the  business  unit,  as  an  abstract  entity,  to  the  owner 

1  The  profit-and-loss  statement  is  another  important  exhibit.  It  differs  from 
the  income  statement  in  that  it  is  a  showing  of  the  amount  of  sales  in  a  given  period 
compared  with  the  expense  of  producing  the  particular  things  sold.  Accurate 
profit-and-loss  statements  represent  the  highest  achievements  of  modern  account- 
ing and  cost-keeping  methods. 


138  OUTLINES    OF   ECONOMICS 

or  owners  of  the  business,  —  the  amount  which  would  be  left  if 
the  business  were  sold  as  a  whole  at  a  price  just  equal  to  the 
total  imputed  value  of  the  assets  minus  the  actual  outstanding 
obligations  (the  accounts  payable).1  It  will  be  noted  that  the 
item  called  "profits"  is  the  variable  by  which  the  account  is 
balanced.  On  such  a  showing  as  this  the  owners  might  decide 
to  take  $5000  out  of  the  business  as  dividends,  or  personal  profits, 
as  the  case  may  be.  This  would  reduce  the  "cash  "  to  $2000  and 
correspondingly  reduce  profits.  They  may  decide,  also,  per- 
manently to  retain  $10,000  of  their  earnings  in  the  business. 
"Profits"  would  then  be  reduced  to  $10,000,  and  the  "income 
reinvested"  or  "surplus,"  as  it  is  often  called,  would  be  increased 
to  $70,000.  In  practice  "surplus"  and  "profits"  often  constitute 
only  one  item  in  the  accounts.  In  the  case  of  corporations  the 
"original  investment"  item  is  called  "capital"  and  represents 
the  par  value  of  the  corporation's  securities,  whether  the  full 
amount  has  been  actually  paid  in  or  not.  Surplus  profits  in  such 
cases  can  be  easily  converted  into  "capital"  by  means  of  "stock 
dividends." 

In  the  legal  aspect,  however,  the  business  does  not  always 
appear  to  have  so  distinct  a  unity  of  its  own.  This  varies  with 
the  form  of  business  organization,  of  which  there  are  three  im- 
portant types:  the  individual  entrepreneur,  the  partnership,  and 
the  corporation. 

The  Individual  Entrepreneur.  —  Any  individual  may  set  him- 
self up  as  a  business  man,  an  entrepreneur,  without  any  legal 
formality  except  the  payment  of  the  license  fee  which  most  states 
impose  on  some  kinds  of  business  undertakings,  such  as  liquor 
dealing,  and  which  some  states,  especially  in  the  South,  impose 
upon  many  kinds  of  undertakings.  The  individual  entrepreneur 
still  dominates  the  field  in  agriculture,  small  retail  trade,  and  in 
local  "shop  industries." 

In  the  legal  aspect  the  obligations  of  a  business  conducted  by 

1  The  form  of  balance  sheet  given  in  the  text  is  in  reality  a  simple  adaptation 
of  the  kind  of  balance  sheet  used  in  the  published  statements  of  corporation 
accounting.  But  if  the  individual  proprietor  of  a  small  business  keeps  an  accurate 
ledger  account  with  himself,  the  result  is  the  same  so  far  as  the  independence  of 
the  business  as  an  accounting  unit  is  concerned. 


BUSINESS   ORGANIZATION  139 

an  individual  entrepreneur  are  the  personal  obligations  of  the 
entrepreneur.  All  of  his  possessions  of  whatever  kind *  are 
jeopardized  by  his  business  risks.  If  the  entrepreneur  conducts 
two  distinct  business  undertakings,  the  assets  of  one  may  be 
seized,  if  necessary,  to  secure  the  liabilities  of  the  other.  The 
personal  liability  of  the  individual  entrepreneur  is  accordingly 
said  to  be  unlimited.  The  usefulness  of  this  kind  of  business 
organization  is  limited,  obviously,  to  small  undertakings,  where 
the  capital  and  credit  of  the  individual  business  man  are  adequate. 

Partnerships.  —  A  "firm"  or  partnership  represents  a  joint 
undertaking  by  individual  entrepreneurs.  Partnerships  are  most 
common  in  mercantile  undertakings  of  moderate  size,  in  small 
manufacturing  establishments,  and  in  the  professions.  This  join- 
ing of  interests  makes  larger  undertakings  possible,  but  relatively 
increases  the  personal  liability  of  the  individual  members  of  the 
firm.  For  each  member  is  personally  liable  for  all  of  the  obliga- 
tions contracted  by  the  firm,  as  well  as  those  contracted  in  the 
ordinary  course  of  business  by  any  other  one  member  of  the 
firm.2  The  partners  may  have  a  contract  binding  among  them- 
selves as  to  their  respective  contributions  (of  money  or  time), 
shares  in  profits,  and  liabilities.  But  a  member  released  from 
personal  liability  by  an  agreement  of  this  kind  is  still  liable  for 
all  obligations  incurred  by  the  firm.  The  agreement  only  gives 
a  basis  for  instituting  legal  proceedings  to  recover  the  amount  of 
his  personal  losses  from  the  other  members  of  the  firm. 

Aside  from  (i)  the  excessive  personal  liability  involved,  the 
partnership  is  open  to  objection  from  the  business  man's  point 

1  The  "exemption  laws"  of  some  states  constitute  an  exception  which  does 
not  affect  the  principle  involved. 

2  This  refers  to  the  status  of  the  ordinary  partnership  under  common  law. 
The  statutes  of  some  states  provide  for  a  special  form  of  limited  partnership,  in 
which  one  or  more  of  the  partners  are  special  partners,  who  are  not  personally 
liable,  save  for  their  investment  in  the  business,  and  who  are  allowed  to  take  no 
active  part  in  the  management  of  the  business.     In  a  few  states  there  is  a  special 
form  called  a  limited  partnership  association,  in  which  the  liability  of  all  the 
partners   is   limited.     These    are    practically   joint-stock    companies    with    non- 
transferable  shares.     The  partnership  in  commcndam,  which  still  exists  in  Louisi- 
ana as  a  heritage  of  the  civil  law,  is  essentially  like  the  statutory  limited  partnerships 
of  other  states. 


140  OUTLINES   OF  ECONOMICS 

of  view,  because :  (2)  It  is  impossible  for  a  partner  to  retire  from 
a  firm  without  dissolving  the  partnership  and,  possibly,  break- 
ing up  the  business.  The  death  or  insolvency  of  any  partner  has 
the  same  effect.  (3)  A  new  member  cannot  enter  the  firm  nor 
can  a  member  transfer  his  interests  to  another  person  without 
the  consent  of  all  the  members  of  a  firm,  —  requirements  which 
naturally  follow  from  the  nature  of  a  partnership.  (4)  The 
partnership  form  of  organization  is  not  adapted  to  undertakings 
requiring  large  investments  of  capital  and  hence  requiring  the 
cooperation  of  a  large  number  of  persons.  What  advantages  the 
partnership  has  come  from  the  ease  with  which  it  can  be  organ- 
ized and  dissolved,  and  from  its  elasticity,  —  that  is,  the  ease 
with  which  the  contractual  relations  among  the  partners,  bind- 
ing as  among  themselves,  can  be  altered  to  suit  any  contingencies 
that  may  arise. 

The  Corporation. — The  federal  census  of  1905  showed  that 
although  less  than  one  fourth  of  the  manufacturing  undertakings 
included  in  that  enumeration  were  organized  as  corporations, 
yet  these  produced  nearly  three  fourths  of  the  total  manufactur- 
ing product  (measured  in  money  value).  Most  banks  and  insur- 
ance companies  are  corporations,  while  in  the  field  of  railway 
transportation  corporations  are  in  almost  exclusive  control.  Ac- 
count should  also  be  taken  of  the  large  and  growing  number  of 
mercantile  undertakings  organized  as  corporations. 

In  the  case  of  the  corporation  the  legal  view  and  the  account- 
ing view  of  the  business  unit  are  practically  identical.  While 
the  ordinary  partnership  is  in  law  simply  a  group  of  individual 
entrepreneurs,  the  corporation  is  regarded,  for  some  purposes,  as 
a  "person."  To  the  incorporated  business  unit,  —  an  abstract 
thing,  as  we  have  seen,  —  the  law  imputes  some  of  the  attributes 
of  personality,  —  and  of  a  personality  distinct  from  that  of  the 
individual  men  who  are  the  stockholders  of  the  corporation.1 

Municipalities,  universities,  monasteries,  guilds,  etc.,  were  commonly 
incorporated  by  royal  charter  long  before  business  corporations  of  the 

"Several  states  authorize  the  organization  of  "joint-stock  companies"  which 
are  like  corporations  in  all  essential  particulars,  and  are  sometimes  called  "quasi- 
corporations."  In  theory  they  are  incorporated  partnerships  with  transferable 
shares  and  (usually)  with  limited  liability. 


BUSINESS   ORGANIZATION  141 

modern  kind  arose,  —  for  this  did  not  occur  until  the  rise  of  "capitalism" 
in  the  seventeenth  century.  The  great  trading  and  colonizing  companies, 
such  as  the  British  East  India  Company,  the  Virginia  Company,  the  Guinea 
Company,  etc.,  were  the  prototypes  of  the  modern  business  corporation. 
In.connection  with  these  trading  companies  the  joint-stock  principle,  which 
had  already  been  used  in  a  few  isolated  instances  of  banking,  was  developed. 
This  was  the  practice  of  issuing  certificates  to  those  who  made  contributions 
to  the  "joint  stock"  (or  capital)  of  a  company,  which  entitled  the  holder 
to  a  proportionate  share  in  the  profits  accruing  to  the  joint  stock.  The 
modern  business  corporation,  like  these  early  trading  companies,  is  based 
essentially  on  the  combination  of  the  joint-stock  principle  with  the  legal 
recognition  of  the  business  unit  as  a  distinct  entity. 

At  the  beginning  of  the  nineteenth  century  what  few  corporations  there 
were  in  America  were,  for  the  most  part,  banks,  insurance  companies,  or 
canal  and  turnpike  companies.  The  introduction  of  railways  in  the  third 
decade  of  the  century  greatly  stimulated  the  organization  of  corporations, 
because  these  new  undertakings  required  larger  investments  of  capital  than 
could  be  furnished  by  any  individual  or  firm.  State  enterprise,  it  is  true, 
promised  at  one  time  to  be  an  important  factor  in  canal  and  railway  building, 
but  such  state  undertakings  were  usually  planned  with  the  purpose  of  de- 
veloping natural  resources,  attracting  immigration,  and  building  up  the 
.trade  of  particular  districts  and  particular  cities  rather  than  of  getting  money 
profits.  Most  of  these  state  undertakings  had  succumbed  by  1840,  so  that 
the  field  was  left  open  for  business  enterprise.  In  the  general  expansion  and 
reorganization  of  business  that  followed  the  Civil  War  the  corporation  form 
of  organization  began  to  be  more  generally  used  for  all  kinds  of  business 
undertakings.  The  growing  importance  of  corporations  in  business  life  is 
partly  an  effect  and  partly  a  cause  of  the  growing  size  of  the  business  unit. 

The  Corporation  Charter.  — The  corporation  is  a  creature  of 
the  state,  its  right  to  exist  being  dependent  on  a  charter  or  on 
articles  of  incorporation,  granted  or  approved  by  the  state.  In- 
corporation formerly  necessitated  a  special  act  of  the  legislature 
in  each  case.  This  gave  opportunity  for  favoritism  and  monop- 
oly and  subjected  corporations  of  all  kinds  to  hostility  and 
suspicion.  Most  corporations  are  now  organized  under  general 
laws,  whereby  any  group  of  men  can  secure  a  corporation  charter 
by  complying  with  certain  prescribed  conditions.  In  fact,  all 
but  six  states  now  have  constitutional  provisions  against  the 
granting  of  charters  to  business  corporations  by  special  act. 

It  was  formerly  a  common  practice  to  grant  corporation  char- 
ters in  perpetuity,  but  the  decision  of  Chief  Justice  Marshall  in 


142  OUTLINES   OF  ECONOMICS 

the  Dartmouth  College  case,  whereby  the  corporation  charter 
was  declared  to  constitute  a  binding  contract  between  the  state 
and  the  corporation,  which  could  not  be  altered  or  amended  by 
the  state  except  with  the  consent  of  the  corporation,  has  led  to 
the  general  practice  of  limiting  the  life  of  corporations  to  terms 
of  from  twenty  to  one  hundred  years,  fifty  years  being  a  common 
period.  The  corporation  may,  of  course,  secure  a  new  charter 
at  the  expiration  of  the  old,  but  the  limited  term  gives  the  state 
the  opportunity  to  change  the  requirements  of  the  charter  from 
time  to  time,  or  to  refuse  reincorporation  altogether,  as  may  seem 
most  desirable.  Most  states,  moreover,  now  specifically  reserve 
the  right  to  alter  or  amend  the  corporation  charter  at  pleasure. 

Corporation  charters,  or  articles  of  incorporation,  usually  con- 
tain details  relating  to  such  matters  as  the  purpose  or  purposes 
for  which  the  corporation  is  formed,  its  principal  place  of  busi- 
ness, the  number  of  its  directors,  and  the  amount  of  its  capitali- 
zation. 

Lack  of  Uniformity  in  State  Laws.  — Many  difficulties  in  the 
public  control  of  corporations  have  arisen  from  the  fact  that 
while  charters  are  granted  by  individual  states,  the  activities  of 
many  business  corporations  extend  over  the  boundaries  of  many 
states.  Moreover,  some  states  are  much  more  lenient  than 
others  in  such  matters  as  the  control  of  capitalization,  require- 
ments as  to  publicity,  limitations  on  the  scope  of  activity  of  a 
single  corporation,  taxes  and  fees,  etc.  New  Jersey  has  become 
known  as  the  "home  of  corporations"  despite  the  fact  that  some 
states  have  even  more  lenient  laws  than  New  Jersey.  New  Jersey 
has  been  favored,  however,  on  account  of  the  proximity  of  New 
York  City,  —  the  real  home  of  most  of  the  greater  corporate  in- 
terests of  the  country,  —  as  well  as  on  account  of  its  early  start 
and  the  adaptability  of  its  laws  to  the  most  modern  type  of  cor- 
poration,—  the  holding  company.  (See  p.  150.) 

Other  states,  with  stricter  laws,  could  not  prevent  corporations 
organized  under  lax  laws  from  doing  business  within  their  terri- 
tory so  far  as  that  business  is  interstate.  So  far,  however,  as  a 
corporation  organized  under  the  laws  of  one  state  carries  on  any 
part  of  its  business  wholly  within  the  borders  of  another  state, 


BUSINESS    ORGANIZATION  143 

the  latter  state  has  the  right  of  refusing  to  recognize  it  as  a  cor- 
poration; that  is,  the  right  to  treat  it  as  a  mere  partnership.  In 
practice,  however,  one  state  freely  recognizes  the  corporations  of 
another  state  under  the  rule  of  "interstate  comity."  In  fact, 
many  corporations  transact  all  their  business  outside  the  borders 
of  the  state  which  chartered  them.  The  real  standards,  therefore, 
are  the  laxest  standards,  not  the  highest.  More  use  on  the  part 
of  American  states  of  the  power  of  exacting  certain  standards 
from  "foreign  corporations,"  as  they  are  called,  is  much  to  be 
desired. 

Corporation  Capital  and  Securities.  —  In  a  strictly  legal  sense 
the  capitalization  of  a  corporation  is  the  amount  of  its  authorized 
capital  stock.  This  capitalization  represents,  in  theory,  the 
amount  of  money  actually  invested  in  the  business  by  the  original 
stockholders.  As  a  matter  of  fact,  the  full  amount  of  the  au- 
thorized capital  is  rarely  paid  in  at  the  organization  of  a  new  cor- 
poration. The  capitalization  is  apt  to  be,  in  practice,  a  purely 
arbitrary  thing,  —  a  nominal  money  sum  divided  into  units  or 
shares,  the  relative  holdings  of  different  individuals  being  meas- 
ured by  the  number  of  shares  they  own. 

Corporation  stock  is  divided  into  two  general  classes,  —  pre- 
ferred stock  and  common  slock,  although  many  corporations  issue 
only  the  latter.  Preferred  stock  represents  a  prior  claim  on  the 
earnings  of  the  corporation.  A  corporation  which  has  "6  per 
cent  preferred  stock"  outstanding  can  pay  no  dividends  to  its 
common  stockholders  until  it  has  paid  6  per  cent  dividends  on 
its  preferred  stock.  Preferred  stock  may  be  cumulative  (in  which 
the  prior  claims  to  dividends  accumulate  from  year  to  year,  if 
unpaid)  or  non-cumulative.  It  may  or  may  not  have  any  claim 
on  any  part  of  the  surplus  profits  remaining  after  a  certain  rate 
of  dividend  has  been  paid  on  the  common  stock.  There  may  be 
several  different  grades  of  preferred  stock,  —  first  preferred, 
second  preferred,  etc. 

In  the  popular  use  of  the  word  the  capitalization  of  a  corpora- 
tion includes  also  its  funded  debt.  The  funded  debt  is  represented 
by  bonds,  which  are  interest-bearing  promises  to  pay  certain  sums 
of  money  at  definite  times  in  the  future.  There  are  many  differ- 


144  OUTLINES   OF   ECONOMICS 

ent  kinds  of  bonds,  but  three  principal  classes  are:  (i)  mortgage 
bonds,  (2)  collateral  trust  bonds,  (3)  income  and  debenture 
bonds.  The  first  class  is  based  on  a  mortgage  of  all  or  of  a  specific 
part  of  the  property  of  a  corporation.  Collateral  trust  bonds  are 
secured  by  the  pledge  of  securities  issued  by  other  corporations, 
but  owned  by  the  corporation  issuing  the  bonds.  They  have 
been  much  used  in  financing  railway  consolidations.  Income 
and  debenture  bonds  are  usually  secured  only  by  the  earning 
capacity  of  the  business.  Industrial  corporations  make  less  use 
of  bonds  than  do  railways,  and  confine  themselves  usually  to  the 
mortgage  bond  type,  —  of  which,  however,  there  are  many  sub- 
ordinate varieties.  In  the  case  of  many  corporations  the  mort- 
gage security  behind  an  issue  of  bonds  is  in  itself  not  of  great 
importance,  for  the  property  mortgaged  is  apt  to  be  worthless 
except  as  an  integral  part  of  a  unified  business  establishment. 
The  mere  power  of  foreclosure,  however,  gives  mortgage  bond- 
holders a  position  of  strength  in  the  reorganization  of  insolvent 
corporations. 

Bonds  are  sometimes  said  to  represent  "creditor  interests," 
and  stock  "entrepreneur  interests."  This  statement  is  sugges- 
tive and  is  fairly  accurate.  In  fact,  however,  stock  and  bonds 
are  simply  different  kinds  of  equities  in  a  business,  —  conveying 
the  right  to  receive  income,  to  share  in  the  distribution  of  the 
assets  in  case  of  insolvency,  and  to  have  a  voice  in  the  manage- 
ment. Stockholders  alone  participate  in  the  management  of  the 
corporation,  although  bondholders  are  often  able  to  dictate 
policies  when  the  affairs  of  a  corporation  are  in  a  precarious  con- 
dition. Bonds  differ  from  stock  in  being  terminable  at  a  definite 
period  of  time  in  the  future.  In  practice,  however,  the  bonds  of 
great  corporations  are  usually  replaced  by  new  issues  as  rapidly 
as  they  mature. 

Overcapitalization.  — Much  has  been  said  about  the  over- 
capitalization of  corporations,  —  "stock-watering,"  as  it  is  called. 
Only  a  few  states  require  that  all  the  nominal  capitalization 
should  represent  capital  actually  invested.  In  most  states,  more- 
over, it  is  not  difficult  for  a  corporation  to  increase  its  capitali- 
zation from  time  to  time  in  order  to  secure  funds  from  the  sale 


BUSINESS    ORGANIZATION 


'45 


of  securities,  or  (in  the  case  of  stock-dividends)  in  order  to  afford 
a  basis  for  the  distribution  of  surplus  profits  without  employing 
an  excessively  high  interest  rate.  It  is  this  last  cause  of  in- 
creased capitalization  that  is  of  special  importance  in  this  con- 
nection. 

On  the  one  hand  it  is  urged  that  capitalization  is  a  nominal 
thing,  that  it  is  immaterial  whether  a  corporation  pays  12  per 
cent  dividends  on  $1,000,000  of  capital  stock  or  6  per  cent 
dividends  on  $2,000,000  of  capital  stock.  On  the  other  hand  it 
is  said  that  capitalization  should  not  be  a  merely  nominal  thing, 
but  that  it  should  represent  the  actual  amount  of  the  investment; 
that,  without  regard  to  the  amount  of  capitalization,  regularly 
recurring  dividends  of  12  per  cent  suggest  excessive  profits  in  a 
way  that  6  per  cent  dividends  do  not. 

The  argument  in  favor  of  a  closer  correspondence  between 
capitalization  and  real  investment  is  especially  strong  in  the 
case  of  railways  and  other  transportation  corporations  with 
quasi-public  functions,  municipal  public  service  corporations, 
and  corporations  enjoying  natural  monopolies  of  all  kinds.  For 
there  is  a  growing  feeling  that  such  corporations  are  in  a  peculiar 
sense  social  trustees,  to  whom  have  been  committed  certain 
public  economic  functions  that  might  very  properly  be  per- 
formed by  the  state,  if  that  course  were  deemed  the  more  advan- 
tageous. That  such  corporations  should  be  restricted  to  the 
payment  of  a  reasonable  dividend  on  reasonable  capitalization 
would  seem  to  be  a  proposition  that  is  scarcely  open  to  question.1 
Yet  excessive  profits  are  what  make  excessive  dividends  possible, 
and  whether  profits  are  excessive  or  not  can  be  determined  in 
most  cases  without  reference  to  capitalization  by  the  compulsory 
use  of  adequate  accounting  methods. 

Overcapitalization  should  be  looked  at  also  from  the  point  of 
view  of  the  investor,  —  a  point  of  view  too  often  overlooked. 
When  overcapitalization  is  permitted,  it  is  frequently  extremely 
difficult  and  often,  indeed,  impossible  for  the  ordinary  investor 
to  know  precisely  what  he  is  buying  when  he  purchases  a  share 

1  It  is  better  to  curtail  excessive  profits  by  public  control  of  rates,  prices,  and 
services  than  by  arbitrarily  limiting  the  dividend  rate. 

L 


146  OUTLINES   OF   ECONOMICS 

of  stock  of  an  overcapitalized  company.  It  helps  to  approxi- 
mate equality  of  opportunity  for  all  when  there  is  an  exact  cor- 
respondence between  investment  and  capitalization.  If  a  person 
buys  a  share  of  national  bank  stock  at  $4000,  he  at  once  knows 
that  the  original  investment  was  $100.  The  apparently  high 
price  immediately  challenges  attention,  and  the  investor  is  led  to 
look  into  the  grounds  of  the  high  price.  There  are  cases  in  which 
such  a  price  would  prove  a  remunerative  investment,  but  it  is 
well  to  warn  the  investing  public  by  prohibition  of  overcapitali- 
zation. It  has  been  strongly  urged,  and  with  some  ground,  that 
it  is  in  every  way  highly  desirable  that  the  corporate  property  of 
the  country  should  be  more  widely  distributed  ;  and  to  promote 
this  end,  every  measure  which  gives  the  average  man  a  "square 
deal"  in  investments  must  be  strongly  favored. 

While  overcapitalization  has  thus  many  undesirable  features, 
it  has  nevertheless  sometimes  been  unduly  emphasized  in  discus- 
sions of  corporation  reform,  to  the  neglect  of  other  and  more 
important  points. 

In  this  connection  we  should  note  the  difference  between  the 
"capitalization"  and  the  "capital"  of  a  corporation.  The  busi- 
ness world  uses  the  term  "capital"  in  two  ways:  it  speaks  of  the 
total  permanent  investments,  —  the  amount  of  money  "tied  up," 
—  in  a  business  as  its  capital,  and  it  also  speaks  of  the  total  sell- 
ing value  of  the  business  as  a  whole  as  its  capital.  This  last  may 
depend  in  part  on  such  intangible  things  as  monopoly  power  or 
good  will.  It  is  measured  by  the  "capitalized"  earning  capacity 
of  the  business,  or,  approximately,  by  the  market  value  of  the 
corporation's  securities,  as  distinct  from  the  par  values  which 
measure  the  nominal  capitalization  of  the  corporation. 

Form  of  Capitalization.  —  A  significant  feature  of  recent  de- 
velopment in  corporation  finance  is  the  multiplicity  of  types  of 
corporate  securities.  It  is  no  uncommon  thing,  for  example,  for 
the  equities  in  a  railway  corporation  (in  addition  to  the  floating 
debt,  or  accounts  payable)  to  be  divided  among  a  dozen  or  twenty 
varieties  of  bonds  and  two  or  three  varieties  of  stock.  This 
multiplicity  of  securities  is  of  advantage  to  the  corporation  in 
that  it  enables  it  to  offer  to  investors  and  speculators  a  carefully 


BUSINESS   ORGANIZATION  147 

graded  assortment  of  risks,  —  a  fact  which  makes  the  total  sell- 
ing value  of  a  corporation's  securities  greater  than  it  would  other- 
wise be.  This  complex  kind  of  capitalization  has,  however,  some 
undesirable  features.  If  the  owners  of  a  particular  security,  — 
the  common  stockholders,  perhaps,  —  control  the  corporation, 
they  may  desire  to  increase  the  value  of  their  securities  for  specu- 
lative purposes  by  the  payment  of  unearned  dividends,  very 
properly  a  criminal  proceeding  according  to  the  laws  of  some  states 
—  a  proceeding  which  would  be  opposed  to  the  interests  of  the  hold- 
ers of  all  the  other  securities  of  the  corporation.  Moreover,  in 
cases  of  insolvency  and  reorganization,  it  is  a  difficult  matter  to 
untangle  and  to  adjust  equitably  the  rights  of  the  holders  of  the 
different  kinds  of  securities. 

In  times  of  prosperity  corporations  often  pay  for  extensions  of 
their  plants  from  the  proceeds  of  bond  sales,  because  it  is  esti- 
mated that  the  earning  power  of  such  extensions  will  more  than 
suffice  to  pay  the  interest  on  the  bonds  and  will  afford  a  hand- 
some surplus  for  the  stockholders.  Corporations  thus  accumu- 
late in  prosperous  times  an  unwieldy  load  of  fixed  charges  in  the 
form  of  interest  on  bonds,  —  a  fact  which  is  apt  to  be  a  source 
of  difficulty  in  less  prosperous  years.  In  periods  of  financial 
stringency  these  fixed  charges  are  a  common  cause  of  insolvency, 
receiverships,  and  consequent  reorganizations,  from  which  the 
bondholders  are  apt  to  emerge  as  stockholders,  and  in  which 
the  stockholders  are  apt  to  lose  their  holdings.  The  legal  restric- 
tion of  the  securities  issued  by  any  one  corporation  to  one  kind 
of  stock  and  three  or  four  varieties  of  bonds  is  both  feasible  and 
desirable.  Nor  should  the  bonded  debt  be  allowed  to  greatly 
exceed  the  amount  of  the  paid-up  capital  stock. 

Corporation  Management.  —  The  management  of  business  cor- 
porations is,  as  a  rule,  in  the  hands  of  boards  of  directors,  elected 
by  the  stockholders  from  among  their  own  number.  The  details 
of  management  are  in  the  hands  of  officers,  chosen  usually  by  the 
directors.  In  principle  this  system  achieves  something  like  repre- 
sentative government  of  the  affairs  of  the  corporation.  In  prac- 
tice, in  the  larger  corporations,  some  of  the  directors  are  apt  to 
be  "dummy  directors,"  —  usually  employees  of  the  corporation, 


148  OUTLINES   OF  ECONOMICS 

made  directors  in  order  to  complete  the  number  prescribed  in 
the  charter,  —  or  are  the  representatives  of  great  financial  in- 
terests, and  often  of  competing  interests.  Directors  of  this  latter 
sort  are  not  primarily  concerned  with  the  management  of  a  cor- 
poration in  the  interests  of  its  stockholders  and  bondholders. 
They  are  directors  for  the  purpose  of  guarding  special  interests, 
and  in  many  cases  for  the  purpose  of  preventing  "competition" 
from  becoming  anything  more  active  than  an  armed  peace. 

In  many  cases  the  real  direction  of  a  corporation's  policies  is 
in  the  hands  of  an  "executive  committee  "  or  "finance  committee  " 
of  three  or  five  directors  representing  the  person  or  persons  in 
actual  control  of  the  corporation. 

Advantages  of  the  Corporation  as  a  Form  of  Business  Organ- 
ization. —  From  the  point  of  view  of  the  business  man  the  cor- 
poration presents  decided  advantages  over  the  partnership  for 
all  undertakings  of  considerable  size.  Some  of  its  points  of 
superiority  are:  (i)  Stockholders  usually  have  no  personal  lia- 
bility for  the  corporation's  obligations  except  so  far  as  the  full 
par  value  of  their  stockholdings  has  not  been  paid  up.1  (2)  The 
relative  permanence  and  stability  of  the  corporation  are  of  decided 
advantage,  especially  in  undertakings  requiring  large  invest- 
ments of  capital  in  relatively  fixed  and  permanent  forms.  (3)  The 
concentration  of  executive  power  in  the  hands  of  directors  and 
officers  leads  to  efficiency  in  management.  (4)  The  transfer- 
ability  of  corporation  securities  makes  it  possible  for  stockholders 
to  enter  or  leave  the  undertaking  at  pleasure.  (5)  The  division 
of  the  securities  into  small  units  and  into  different  grades  and 
classes  affords  opportunities  to  all  kinds  of  investors,  —  the  small 
and  the  large,  the  conservative  and  the  venturesome.  (6)  All  of 
the  advantages  named  make  it  easier  for  the  corporation  to 
attract  and  to  use  efficiently  large  amounts  of  capital,  furnished 
by  many  different  investors. 

Social  Aspects  of  the  Growth  of  Corporations.  — That  corpora- 
tions do  possess  desirable  features,  from  the  point  of  view  of 

1  Exception  should  be  made  of  banking  and  insurance  corporations,  in  the  case 
of  which  "double  liability"  on  the  part  of  the  stockholders  is  common.  A  few 
states  impose  some  measure  of  personal  liability  upon  the  stockholders  of  all 
corporations  organized  under  their  laws. 


BUSINESS   ORGANIZATION 


149 


business  interests,  is  a  fact  clearly  evidenced  by  the  unprecedented 
growth  of  this  form  of  business  organization.  In  the  main,  effi- 
ciency for  business  purposes,  for  money  making,  means  efficiency 
from  the  social  point  of  view,  productive  efficiency,  also.  But, 
nevertheless,  the  two  viewpoints  are  not  identical,  and  what  is 
desirable  from  one  point  of  view  is  not  always  desirable  from 
the  other  point  of  view. 

The  gap  between  money  making  and  service  to  society  (never 
quite  identical  things)  is  distinctly  widened  when  those  in  control 
of  a  corporation's  policies  subordinate  the  profits  to  be  obtained 
by  the  sale  of  its  products  to  the  profits  to  be  obtained  by  specu- 
lation in  its  securities.  Many  of  our  greatest  corporations  are 
directed  by  men  to  whom  fluctuations  in  capital  values  (as  repre- 
sented in  the  prices  of  securities)  are  a  much  more  important 
source  of  personal  income  than  are  the  net  earnings  of  such 
corporations.  The  payment^  of  unearned  dividends,  the  non- 
payment of  earned  dividends,  the  direction  of  a  corporation's 
policy  for  the  benefit  of  the  holders  of  one  kind  of  security  among 
the  different  ones  issued  by  the  corporation,  the  effecting  of  cor- 
porate combinations  and  reorganizations  that  will  affect  the  stock 
exchange  rather  than  the  produce  market,  —  these  are  some  of 
the  more  obvious  results  of  the  unfortunate  relation  between 
corporation  management  and  speculation  in  corporation  securi- 
ties. 

It  should  also  be  noted  in  this  connection  that  the  growth  of 
corporations  is  bringing  with  it  a  subtle  but  very  significant 
change  in  the  nature  of  the  institution  of  private  property.  So 
far  as  a  large  and  increasing  proportion  of  productive  wealth  is 
concerned,  we  are  losing  that  direct  relation  of  ownership  be- 
tween men  and  goods  which  Arthur  Young  had  in  mind  when  he 
said,  "The  magic  of  property  turns  sand  into  gold."  We  often 
have,  instead,  several  layers  of  corporation  securities  interposed 
between  the  ultimate  owners  and  the  ultimate  objects  of  owner- 
ship. The  effect  of  this  will  undoubtedly  be  to  bring  about  the 
more  thorough  domination  of  business  principles  in  the  business 
world.  Sentiment,  the  honored  traditions  of  long-established 
firms,  the  "pride  of  ownership,"  the  joy  of  workmanship  (which 


150  OUTLINES   OF  ECONOMICS 

may  be  felt  by  the  employer  who  turns  out  a  good  product,  as 
well  as  by  the  workman)  are  bound  to  yield  yet  more  completely 
to  the  sway  of  the  cold  logic  of  corporation  accounts  and  stock- 
market  quotations.  The  adequacy  of  purely  business  principles 
as  the  foundation  of  our  economic  life  will  be  tested  more  thoroughly 
under  the  corporation  form  of  organization  than  ever  before. 

Trusts.  —  A  distinctive  feature  of  the  economic  development 
of  the  past  thirty  years  has  been  the  combination  of  individual 
corporations  into  larger  concerns,  or  trusts.  The  "trust,"  in  the 
technical  sense,  involved  either  giving  a  board  of  trustees  the 
absolute  control  of  the  actual  properties  of  the  different  con- 
cerns in  the  combination,  or  what  amounted  to  the  same  thing, 
assigning  the  stock  of  each  corporation,  with  its  voting  power, 
to  them  in  exchange  for  "trust  certificates,"  on  which  dividends 
were  paid.  The  Standard  Oil  Trust  of  1882  was  the  first  com- 
bination of  this  kind,  but  it  was  speedily  followed  by  several 
others.  In  1890,  in  a  case  brought  by  the  state  of  New  York 
against  the  sugar  trust,  the  trust  agreement  was  held  to  be  illegal 
under  common  law.  Corporate  combinations  were  not  destroyed 
by  this  decision.  They  changed,  however,  to  a  more  definitely 
coherent  form,  —  that  in  which  a  single  great  corporation  domi- 
nates the  consolidation. 

In  most  cases,  this  corporation,  which  is  usually  organized 
for  the  purpose,  does  not  own  the  actual  plants  of  the  various 
concerns  in  the  combination,  but  simply  owns  all  or  a  majority  of 
the  stock  of  each.  It  is  accordingly  called  a  "  holding  company." 
The  holding  company  exchanges  its  own  securities  for  the  securi- 
ties of  constituent  companies,  or,  when  necessary,  it  buys  the 
securities  of  the  constituent  companies  with  funds  secured  from 
the  sale  of  its  own  securities,  —  sometimes  by  the  sale  of  bonds 
secured  by  the  pledge  of  the  securities  of  constituent  companies 
as  collateral.  Not  only  in  industrial  consolidations,1  but  also  in 
railway  and  electric  railroad  mergers  has  the  holding  company 
device  become  important. 

1  A  very  complete  list  of  "trusts,"  prepared  by  Mr.  Byron  W.  Holt  for  the 
World  Alumnae  (1908),  contains  the  names  of  about  250  industrial  combinations, 
most  of  which  are  holding  companies. 


BUSINESS   ORGANIZATION  15! 

From  the  point  of  view  of  business  organization  the  holding 
company  is  simply  an  extension  of  the  principle  of  the  corpora- 
tion. The  holding  company  needs  for  purposes  of  control  only 
a  majority  interest  in  the  stocks  of  its  subsidiary  corporations. 
Various  holding  companies  may  in  turn  be  combined  by  means 
of  one  larger  holding  company,  —  and  the  process  may,  and 
does,  go  even  further.  An  individual  capitalist  may,  by  an 
investment  of  $1,000,000,  for  example,  control  a  holding  company 
with  a  stock  issue  of  $2,000,000,  which  in  turn  may  control  cor- 
porations with  $4,000,000  of  stock  outstanding,1  —  and  some  of 
these  last  may  in  their  turn  be  holding  companies.  The  result 
is  a  tremendous  concentration  of  industrial  and  financial  power, 
with  the  minimum  of  liability.  The  uncontrolled  use  of  the 
holding  company  device  leads  to  neglect  of  the  interests  of  the 
minority  stockholders  in  the  various  corporations  concerned;  to 
difficulty  in  fixing  the  legal  responsibility  for  corporate  mis- 
deeds; to  an  undesirable  complexity  in  the  economic  and  legal 
relations  of  the  holders  of  securities  in  the  different  corporations, 
and  to  the  subordination  of  industrial  to  speculative  ends. 

The  "trust  problem,"  however,  has  attracted  more  attention 
as  a  problem  of  monopoly  than  as  a  problem  of  business  organi- 
zation. The  problem  of  monopoly  will  be  considered  in  another 
chapter.  Here  it  is  sufficient  to  note  that  combination  and 
monopoly  are  not  identical  things,  that  we  may  have  either  one 
without  the  other.  It  is  true,  however,  that  the  movement  toward 
combination  originated  as  one  manifestation  of  the  efforts  of  men 
engaged  in  competitive  undertakings  to  escape  from  the  restraints 
imposed  upon  them  by  the  fact  of  competition.  Price  agreements, 
selling  bureaus,  division  of  territory,  limitation  of  output,  pool- 
ing, etc.,  are  other  forms  of  the  same  general  effort. 

The  specific  motives  usually  mentioned  as  the  most  important 
causes  of  corporate  combinations  are  (i)  the  greater  economy  of 
the  large-scale  business;  (2)  the  elimination  of  purely  competi- 
tive expenses  (some  kinds  of  advertising,  for  example) ;  (3)  the 

1  It  is  assumed,  for  convenience,  that  the  stock  in  each  case  is  worth  par  and 
that  the  ownership  of  half  of  it  will  give  substantial  control.  In  the  case  of  in- 
dustrial combinations  ownership  of  all  the  stock  of  the  subsidiary  companies  by 
the  holding  company  is  not  uncommon. 


152  OUTLINES   OF  ECONOMICS 

power  to  limit  output  and  control  price.  The  first  of  these  fac- 
tors suggests  the  difficult  question  of  the  most  profitable  size  of 
the  business  unit.  Without  discussing  this  point  in  detail  in  this 
connection  we  may  note  that  the  significant  thing  is  the  most 
economical  size  of  the  industrial  plant  rather  than  of  the  busi- 
ness unit  itself.  Some  of  our  present-day  business  units  are  so 
large  that  they  operate  a  number  of  duplicate  plants.  To  that 
extent,  at  least,  they  are  larger  than  is  necessary  to  secure  maxi- 
mum technical  efficiency.  Whether  competitive  expenses  and 
competitive  prices  are  eliminated  by  combination  depends  on 
whether  the  combination  has  any  real  basis  of  monopoly  power 
over  and  above  the  mere  fact  of  combination,  which,  taken  alone, 
can  give  at  most  only  a  temporary  monopoly. 

It  is  plain,  however,  that  if  any  or  all  of  these  three  classes  of 
advantages  do  exist  in  the  case  of  a  particular  combination,  the 
earning  power  of  the  combination  will  be  greater  than  the  total 
earning  power  of  the  separate  concerns  before  consolidation,  — 
a  difference  which  will  be  reflected  in  the  value  of  the  securities 
of  the  holding  company.  It  is  this  increment  in  capital  value, 
due  to  the  real  or  expected  advantages  of  consolidation,  that  has 
been  the  chief  cause  of  such  combinations.  The  organization  of 
trusts  has  in  many  cases  been  effected  by  professional  "pro- 
moters," whose  connection  with  an  undertaking  does  not  con- 
tinue any  longer  than  is  necessary  in  order  to  secure  the  profits 
of  consolidation.  A  few  great  trusts  like  those  which  dominate 
in  the  oil,  sugar,  steel,  and  tobacco  industries  have  been  con- 
spicuously successful  in  a  business  way.  Many  others  were 
"made  to  sell  ";  that  is,  were  organized  only  in  order  that  profits 
might  be  gained  through  the  sale  of  their  securities,  and  have 
been  weighted  down  by  a  capitalization  not  justified  by  their 
actual  earning  capacity.  Some  of  these  have  already  been  re- 
organized, with  diminished  capitalization;  others,  possibly,  only 
await  the  test  of  a  prolonged  period  of  financial  depression. 

Anti-trust  Laws.  —  Most  states  have  statutes  and  some  have 
constitutional  provisions  against  "combinations  in  restraint  of 
trade."  These  are  aimed  primarily  against  the  large  corpora- 
tions of  the  kind  described,  although  if  strictly  construed  they 


BUSINESS   ORGANIZATION 


'53 


also  make  illegal  the  whole  mass  of  price  agreements  and  trade 
restrictions,  general  and  local,  which  are  a  much  more  common 
and  characteristic  feature  of  modern  business  than  is  generally 
supposed.  Anti-trust  statutes  have  accomplished  but  little,  be- 
cause they  have  been  aimed  at  forms  rather  than  at  facts,  at 
symptoms  rather  than  at  fundamental  causes.  If  there  is  mo- 
nopoly, with  resulting  high  and  discriminatory  prices,  the  social 
action  needed  is  the  rooting  out  of  the  fundamental  cause  of 
monopoly,  or,  in  some  cases,  a  frank  recognition  of  the  fact  of 
monopoly,  coupled  with  the  proper  public  regulation  of  prices 
and  services.  If  evils  appear  in  the  undue  concentration  of 
financial  power,  and  in  the  dominance  of  speculative  motives  in 
business  management,  the  social  action  needed  is  more  stringent 
control  of  the  methods,  purposes,  and  conditions  of  corporation 
organization  and  corporation  management.  The  corporation 
problem  and  the  monopoly  problem  are  distinct  things.  The 
"trust  problem"  may  mean  either  one  thing  or  the  other. 

The  Sherman  anti-trust  act  of  1890  is  a  federal  law,  making 
"combinations  in  restraint  of  trade"  criminal,  so  far  as  the 
field  of  interstate  commerce  is  concerned.  It  has  the  defects  of 
the  similar  enactments  of  the  individual  states.  It  has  been 
used  to  some  extent  by  the  government  as  a  means  of  breaking 
up  railway  combinations,  but  the  results  of  this  application  of 
the  Sherman  act  have  been  generally  considered  to  be  unfortunate. 

Publicity.  —  There  is  a  general  agreement  among  students  of 
corporation  problems  that  greater  publicity  as  to  the  details  of 
corporate  management  is  much  to  be  desired,  both  as  an  end 
in  itself,  and  as  constituting  a  basis  for  the  intelligent  control 
of  corporations.  We  may  distinguish  four  kinds  of  publicity: 
(i)  opening  of  accounts  and  records  to  the  inspection  of  stock- 
holders; (2)  opening  of  accounts  and  records  to  the  proper  admin- 
istrative officials  of  the  state  or  federal  governments;  (3)  periodi- 
cal financial  statements  to  stockholders;  (4)  periodical  financial 
statements  to  proper  administrative  officials. 

Of  these  different  kinds  of  publicity  the  second,  third,  and 
fourth  are  unquestionably  desirable.  The  publicity  of  railway 
accounts  and  the  development  of  uniform  railroad  accounting 


154  OUTLINES    OF   ECONOMICS 

under  the  interstate  commerce  law  has  been  of  great  benefit  to 
the  public,  to  investors,  and  to  the  railways  themselves.  In  re- 
spect to  the  first  kind  of  publicity  mentioned,  it  can  hardly  be 
thought  right  that  every  small  stockholder  should  have  an  un- 
limited right  of  access  to  a  corporation's  books,  especially  in 
competitive  undertakings. 

Federal  Control  of  Corporations.  —  It  has  been  suggested  by 
many  writers  that  the  unfortunate  effects  of  the  lack  of  uniform 
state  requirements  as  to  publicity,  capitalization,  purposes  of 
corporation  organization,  etc.,  could  be  remedied  to  some  extent 
by  federal  action.  Canal,  railway,  and  bridge  companies  have 
in  the  past  been  chartered  by  the  federal  government,  just  as 
national  banks  are  now.  It  would  be  legally  possible  and  eco- 
nomically advisable  to  require  at  least  a  federal  license  from  all 
corporations  engaging  in  interstate  commerce.  Moderate  and  just 
requirements  as  to  publicity,  and  possibly  as  to  capitalization 
and  other  things,  might  very  well  be  imposed  as  the  price  of  a 
federal  license.  Aside  from  the  present  lack  of  uniformity  in 
state  laws,  the  mere  size  of  modern  business  corporations  and  the 
extent  of  their  operations  make  it  difficult  for  any  individual 
state  or  states  to  control  them  efficiently. 

QUESTIONS  AND  EXERCISES 

1.  What  are  the  terms  under  which  corporations  are  chartered  in  your 
own  state?    What  "anti -trust"  laws  are  in  force  there? 

2.  Explain  the  various  items  in  the  published  balance  sheet  of  some  in- 
dustrial corporation. 

3.  What  limitations  should  be  attached  to  the  statement  that  "a  corpora- 
tion is  a  fictitious  person." 

4.  Does  the  word  "capital"  mean  the  same  thing  in  accounting  and  in 
economics  ? 

5.  Report  on  the  history  of  one  of  the  following:    United  States  Steel 
Corporation;     American    Sugar    Refining    Company;     American    Tobacco 
Company;    International  Harvester  Company. 


BUSINESS   ORGANIZATION 


REFERENCES 


155 


BENTLEY,  H.  C.     Corporate  Finance  and  Accounting. 

Commissioner  of  Corporations,  Annual  and  Special  Reports. 

CONYNGTON,  THOMAS.    Corporate  Management ;  and  Corporate  Organization. 

FREUND,  ERNST.     The  Legal  Nature  of  Corporations. 

GREENE,  T.  L.     Corporation  Finance. 

HALLE,  E.  L.  VON.     Trusts,  or  Industrial  Combinations  and  Coalitions  in 

the  United  States. 

HORACK,  F.  E.     The  Organization  and  Control  of  Industrial  Corporations. 
Industrial   Commission,    Report,   Vols.   I,   II,   XIII,   XVIII,   XIX.     (See 

general  index  in  Vol.  XIX  under  "Combinations,"  "Corporations," 

"Capitalization,"  etc.) 
JENKS,  J.  W.     The  Trust  Problem. 
MEADE,  E.  S.     Trust  Finance. 
MONTAGUE,  G.  H.     Trusts  of  To-day. 
MOODY,  JOHN.     The  Truth  about  the  Trusts. 
RIPLEY,  W.  Z.  (ed.).     Trusts,  Pools,  and  Corporations. 
SPARLING,  S.  E.     Business  Organization. 
WILGUS,  H.  L.     Should  there  be  a  Federal  Incorporation  Law  for  Commercial 

Corporations  ? 
WOOD,  W.  A.     Modern  Business  Corporations. 


PART  IV 
VALUE   AND   EXCHANGE 

CHAPTER   XI 
VALUE   AND    PRICE 

IF  every  family  produced  all  the  goods  needed  to  supply  the 
wants  of  its  members,  most  of  the  problems  which  to-day  confront 
economic  science  would  not  exist.  Most  of  the  world's  workers 
are,  however,  contributing  their  services  either  directly  or  indirectly 
(through  the  production  of  goods)  toward  the  satisfaction  of  the 
wants  of  others.  One's  economic  well-being  to-day  depends  pri- 
marily on  two  things:  the  money  income  which  can  be  got  from 
others  in  return  for  one's  services  or  for  the  use  of  one's  land  or 
capital,  and  the  amount  of  things  that  can  be  bought  with  this 
money  income.  The  federal  census  of  1900  showed  that  about 
93  per  cent  of  the  men  over  twenty  years  old  and  about  1 8  per  cent 
of  the  women  of  corresponding  age  were  employed  in  money-mak- 
ing occupations;  and  this  number  does  not  include  those  land- 
lords and  capitalists  whose  income  was  derived  entirely  from 
their  investments.  The  work  of  the  housewife  and  the  services  of 
friendship  embody  utilities,  that  is,  satisfy  human  wants,  just  as 
do  money-making  activities,  but  they  are  not  measured  in  terms 
of  dollars  and  cents.  The  production  of  wealth  is  in  these  days 
mostly  "for  the  market,"  and  wants  are  satisfied  very  largely  by 
goods  obtained  from  the  market.  Most  goods  get  from  those  who 
produce  them  to  those  who  use  them  only  by  the  processes  of 
exchange. 

The  Meaning  and  Significance  of  Value.  —  One  of  the  most 
fundamental  of  all  economic  problems  relates  to  the  ratios  at 
which  goods  are  exchanged  for  one  another.  These  ratios  are 

156 


VALUE   AND   PRICE 


157 


called  exchange  values.  The  exchange  value  of  a  good  is  the  quan- 
tity of  other  goods  that  can  be  obtained  for  it.  Exchange  value  is 
often  called  objective  value,  and  is  to  be  sharply  distinguished 
from  subjective  value,  which,  it  will  be  remembered,  measures 
the  importance  attached  by  an  individual  to  a  particular  unit  of  a 
commodity.  In  this  chapter  the  word  "  value  "  is  to  be  understood 
as  meaning  exchange  value.  It  is  evident  that  the  value  of  a 
commodity  will  vary  with  conditions  of  time  and  place,  and  that 
at  any  particular  time  and  place  it  might  be  expressed  in  a  num- 
ber of  different  ways.  A  pair  of  shoes  might  be  exchanged  for 
four  bushels  of  wheat,  for  two  hats,  or  for  other  quantities  of  other 
commodities.  In  this  sense  any  one  commodity  will  have  not  one, 
but  many,  exchange  values.  It  is,  however,  customary  to-day  to 
express  the  values  of  all  commodities  in  terms  of  one  other  com- 
modity, money.  Price  is  exchange  value  expressed  in  terms  of 
money.  There  are  23.22  grains  of  gold  in  our  monetary  unit,  the 
gold  dollar.  Thus,  when  we  say  that  a  pair  of  shoes  is  worth  four 
dollars,  we  indicate  that  they  have  four  times  the  value  of  23.22 
grains  of  gold.  When  the  words  "  value  "  and  "  price  "  are  used  in- 
terchangeably, as  will  sometimes  be  the  case  in  this  chapter,  there 
is  implied  the  assumption  that  the  value  of  money  is  constant  —  an 
assumption  which,  of  course,  does  not  entirely  correspond  with 
the  facts. 

The  process  by  which  the  ratios  at  which  goods  are  exchanged 
is  determined  is  called  "  valuation."  This  word  is  used  in  a  narrow 
sense  as  referring  to  the  fixing  of  the  exchange  values  of  commodi- 
ties; in  a  broader  sense  it  includes  also  the  determination  of  the 
different  rewards  received  by  those  who  have  contributed  to  the 
production  of  these  commodities.  In  this  broad  sense  the  prob- 
lem of  valuation  is  the  problem  of  the  distribution  of  wealth.  Im- 
agine the  case  of  a  mechanic  employed  at  a  particular  time  in 
the  manufacture  of  machinery  that  will  be  used  in  a  flour  mill. 
The  final  product  of  the  mechanic's  labor  —  the  only  product 
directly  useful  in  the  satisfaction  of  human  wants  —  is  the  flour, 
or  bread  made  from  the  flour.  To  the  making  of  this  final  prod- 
uct thousands  besides  our  mechanic  —  farmers,  agricultural  la- 
borers, railway  officers  and  employees,  other  mechanics,  and  so 


158  OUTLINES   OF  ECONOMICS 

on  in  a  practically  endless  list  —  have  contributed.  What  deter- 
mines the  value  of  the  final  product?  What  proportion  of  this 
value  goes  to  the  mechanic?  What  is  his  share  worth  to  him  as 
the  means  of  getting  the  necessaries  of  life  ?  Of  these  three  ques- 
tions, the  first  and  third  fall  within  the  problem  of  the  valuation 
of  commodities;  the  second,  relating  to  the  valuation  of  the  me- 
chanic's services,  falls  within  the  problem  of  the  distribution  of 
wealth.  At  present  we  are  concerned  with  valuation  in  its  nar- 
rower sense,  although  the  principles  to  be  developed  apply  also 
in  the  case  of  the  valuation  of  the  services  of  the  factors  in  pro- 
duction. The  significance  of  the  subject  of  value  in  economic 
science  lies  in  the  fact  that,  within  the  conditions  set  by  existing 
institutions,  and  within  the  limits  set  by  the  total  production  of 
wealth,  human  welfare,  so  far  as  it  is  dependent  upon  the  pos- 
session of  economic  goods,  is  largely  determined  by  the  process  of 
valuation. 

The  Market.  —  It  is  conceivable  that  the  values  of  goods  might 
be  fixed  by  public  authority,  or  that  the  production  of  the  most 
important  commodities  might  be  monopolized.  Then,  too,  it  is 
possible  to  imagine  a  condition  of  society  in  which  custom  should 
have  such  power  that  values,  when  once  established,  would  be 
changed  very  infrequently.  Still  another  possibility  would  be  a 
regime  of  competition  in  which  every  man  would  be  left  free  to 
buy  and  sell  as  he  pleased  at  such  prices  as  he  could  get.  The 
first  three  factors  —  public  authority,  monopoly,  and  custom  — 
are  among  the  things  which  determine  the  ratios  at  which  goods 
are  actually  exchanged  to-day;  but  the  dominant  factor  is  the 
fourth  one  mentioned  —  the  free  competition  of  the  market. 

In  this  connection  we  mean  by  the  market,  not  a  particular 
place  for  buying  and  selling,  but  the  general  field  within  which  the 
forces  determining  the  price  of  a  particular  commodity  operate.  For 
some  commodities,  especially  perishable  ones,  like  fresh  milk  and 
cream,  the  market  is  distinctly  a  local  one.  In  the  case  of  great 
staple  commodities  like  wheat  and  cotton,  the  market  is  a  world 
market,  for  it  is  impossible  that  the  prices  of  wheat  or  cotton  in 
Europe  should  differ  for  any  considerable  time  from  their  prices 
in  America  by  more  than  the  expense  of  transportation.  So-called 


VALUE   AND    PRICE 


159 


"international"  securities,  such  as  government  bonds  and  the 
stocks  and  bonds  of  certain  great  corporations,  afford  even  a  better 
example  of  goods  for  which  the  market  is  a  world  market.  Some 
commodities  are  used  only  in  a  particular  locality  or  country, 
although  produced  in  many  different  places.  The  American  con- 
sular reports  frequently  contain  advice  to  American  manufac- 
turers as  to  special  kinds  and  varieties  of  goods  used  in  different 
foreign  countries.  The  cotton  mills  of  England,  Germany,  and 
the  United  States  all  make  special  grades  of  cotton  cloth  designed 
especially  for  the  Oriental  market.  Much  more  numerous,  how- 
ever, are  the  goods  which,  although  of  wide  and  general  consump- 
tion, are  produced  in  but  few  localities.  This  is  especially  evi- 
dent in  the  case  of  agricultural  and  mineral  products,  but  it  is 
increasingly  noticeable  in  manufactures. 

Along  with  this  localization  of  industry  there  has  been  a  broad- 
ening of  the  field  of  consumption  of  many  commodities.  Among 
the  factors  which  have  contributed  to  this  result  may  be  men- 
tioned, first,  the  increasingly  cosmopolitan  character  of  modern 
life, —  a  result  of  more  generally  diffused  facilities  for  higher  edu- 
cation, as  well  as  of  the  growing  ease  of  travel  and  communica- 
tion, and  secondly,  what  has  been  called  the  "standardization  of 
taste,"  —  a  result  in  part  of  modern  advertising  methods  and  of 
the  standardization  of  products  which  is  one  of  the  fundamental 
features  of  modern  machine  industry.  Notwithstanding  the  bar- 
riers which  still  exist  in  the  form  of  protective  tariffs  and  local 
prejudices,  a  dominant  feature  of  modern  markets  is  the  localiza- 
tion of  production  and  the  extension  of  the  field  of  consumption. 

The  Conditions  of  Competitive  Valuation.  —  It  is  often  assumed 
that  competitive  prices  are  in  some  way  "natural"  and  right 
prices.  To  guard  against  this  error  it  is  only  necessary  to  remind 
ourselves  that  competition  operates  under  the  limitations  imposed 
by  the  fundamental  institutions  of  the  existing  social  order.  In 
the  analysis  of  valuation  under  purely  competitive  conditions,  we 
shall  assume  the  existence  of  private  property,  since,  strictly 
speaking,  it  is  the  property  rights  in  various  goods  that  constitute 
the  things  that  are  bought  and  sold.  It  is  necessary,  also,  to  as- 
sume the  existence  of  the  right  of  free  contract  —  the  right  of 


160  OUTLINES   OF  ECONOMICS 

each  man  to  sell  for  what  he  can  get,  and  to  buy  for  as  little  as  he 
can  bargain  to  pay.  So  far  as  society  limits  the  right  of  private 
property  and  the  right  of  free  contract,  it  alters  the  conditions 
of  competition  and  correspondingly  affects  the  values  fixed  by 
competition. 

Supply  and  Demand.  —  The  only  goods  which  are  valued  in  the 
market  are  economic  goods;  that  is,  such  goods  as  combine  the 
characteristics  of  utility  and  scarcity.  This  statement  is  a  truism, 
for  no  one  will  pay  for  things  that  he  does  not  want  or  for  things 
that  can  be  obtained  freely.  Utility  and  scarcity  affect  the  mar- 
ket value  of  goods  through  the  operation  of  the  forces  of  demand 
and  supply.  The  general  "common-sense"  explanation  of  the 
valuation  of  goods  takes  the  form  of  the  statement  that  values  are 
determined  by  supply  and  demand.  When  rightly  interpreted, 
this  statement  cannot  be  criticised,  but  it  is  often  used  in  an  en- 
tirely erroneous  sense.  Producers  do  not  usually  throw  their 
goods  unreservedly  on  the  market,  accepting  any  price  that  can 
be  got  for  them,  nor  do  consumers  generally  demand  definite 
amounts  of  goods,  without  reference  to  the  price  of  them.  An 
entirely  accurate  statement,  and  one  that  is  less  apt  to  be  misin- 
terpreted, is  that  prices  are  among  the  factors  determining  supply 
and  demand.  It  may  seem,  accordingly,  something  like  arguing 
in  a  circle  to  attempt  to  explain  value  by  using  the  formula  of 
supply  and  demand;  but  the  fact  is  that  the  explanation  of  value 
is  to  be  sought  in  the  action  of  mutually  dependent  forces,  rather 
than  in  any  one  principle.  Our  next  task  is,  therefore,  the  analy- 
sis of  supply  and  demand. 

The  Nature  of  Demand.  — Mere  desire  for  a  commodity  is  not 
demand  for  it.  The  desire  of  the  poor  man  for  the  counterpart 
of  his  wealthy  neighbor's  automobile  is  in  no  sense  demand. 
Effective  demand  is  sometimes  defined  as  desire  coupled  with  the 
ability  to  pay.  But  to  make  demand  really  effective  there  must 
be  added  to  these  the  inclination  to  buy:  desire  must  be  intense 
enough  to  lead  to  purchase.  As  has  been  shown  in  a  previous 
chapter,  intensity  of  desire  cannot  be  thought  of  as  existing  for 
a  commodity  in  general,  but  only  for  particular  units  of  a  com- 
modity. The  intensity  of  one's  desire  for  an  additional  unit  of  a 


VALUE   AND    PRICE  161 

commodity  depends  upon  the  extent  to  which  one's  wants  are 
satisfied  by  one's  existing  supply  of  that  commodity.  This  is  the 
same  as  saying  that  the  intensity  of  our  desire  for  a  commodity 
is  measured  by  its  marginal  utility. 

Every  person  tends  to  keep  the  marginal  utilities  of  the  differ- 
ent kinds  of  commodities  he  consumes  equal.  Either  by  a  con- 
scious balancing  against  each  other  of  the  pleasures  to  be  ob- 
tained from  two  or  more  possible  purchases,  or  oftener,  by  simply 
buying  the  things  which  we  want  more  than  we  want  other  things, 
we  tend  to  keep  our  unsatisfied  wants  in  a  state  of  approximately 
equal  intensity.  Every  person  thus  has  what  has  been  called  a 
margin  of  consumption,  which  is  measured  by  the  utility  that 
would  be  obtained  by  the  expenditure  of  another  dollar  (or  any 
other  small  amount  of  money)  for  any  one  of  the  things  that  he 
consumes.  An  important  thing  in  the  explanation  of  demand  is 
the  fact  that  this  margin  of  consumption  differs  for  different  per- 
sons, as  well  as  for  the  same  persons  at  different  times.  An 
individual's  margin  of  consumption  depends  primarily  on  his 
income,  but  also  on  his  tastes  and  habits,  his  instinct  for  saving, 
and  the  extent  to  which  he  estimates  present  wants  more  highly 
than  future  wants.  Then,  too,  one's  desires  are  constantly  chang- 
ing under  the  influence  of  whim,  fashion,  satiety,  sellers'  adver- 
tising, education,  travel,  reading,  and  new  experiences  of  all  kinds. 
Expenditures  of  all  sorts  are  thus  called  into  being  by  the  neces- 
sity of  maintaining  the  level  of  the  margin  of  consumption.  The 
advertiser  may  succeed  in  making  us  think  that  we  want  his  goods 
more  than  we  want  other  things  that  we  could  purchase  with  the 
same  amount  of  money;  reading  may  so  stimulate  our  desire  for 
travel  that  we  are  willing  to  curtail  other  expenditures  in  order 
to  secure  it.  Education  ought  to  affect  the  quality  as  well  as 
the  quantity  of  our  wants. 

But  even  if  our  desires  were  constant,  changes  in  prices  would 
in  themselves  effect  continual  alterations  in  the  proportions  of 
various  things  that  make  up  our  purchases.  If  the  price  of  a 
commodity  decreases  to  such  an  extent  that  an  additional  dollar's 
worth  has  a  utility  greater  than  our  margin  of  consumption,  we 
normally  purchase  it.  If  the  price  rises,  we  normally  curtail  our 

M 


162 


OUTLINES   OF   ECONOMICS 


expenditures  for  this  particular  commodity,  and  may  even,  under 
some  circumstances,  become  sellers  of  it  (as  in  the  case  of  the 
householder  who  has  bought  a  large  supply  of  coal  at  five  dollars 
per  ton,  and  who,  when  the  price  rises  to  ten  dollars,  is  willing  to 
sell  part  of  it).  Some  of  the  foregoing  discussion  may  seem  to 
be  a  statement  of  what  is  obvious  and  commonplace,  but  the  neg- 
lect of  these  seemingly  obvious  factors  is  responsible  for  more 
than  one  erroneous  explanation  of  the  way  in  which  values  are 
determined. 

The  Demand  Curve. — The  relations  between  price  and  de- 
mand may  be  shown  concretely  by  the  analysis  of  the  condi- 
tions in  a  hypothetical 
market.  Imagine  the  case 
of  an  isolated  community 
in  which  there  is  consider- 
able use  of  wood  as  a  fuel. 
The  conditions  might  be 
such  as  are  represented 
graphically  in  Figure  i.  In 
this  diagram  distances 
measured  from  O  along 
the  horizontal  line  OX  represent  different  amounts  of  wood,  while 
distances  measured  vertically  from  the  line  OX  represent  prices. 
Assuming  that  the  conditions  of  demand  were  as  represented  in 
the  diagram,  if  the  price  of  wood  were  MP  dollars  a  cord,  OM 
cords  of  wood  would  be  bought.  If  MP  represents  a  relatively 
high  price  for  wood,  this  might  mean  that  many  families  would 
choose  to  go  without  wood,  using  other  kinds  of  fuel  instead. 
Others  would  be  content  with  a  scanty  supply.  If,  however,  the 
price  were  reduced  to  M'P'  dollars  per  cord,  some  of  the  families 
who  would  have  refused  to  buy  at  the  higher  price  would  purchase 
wood,  while  others  would  increase  their  purchases,  so  that  OM' 
cords  would  be  bought.  Similarly,  at  the  price  M"P",  the  amount 
bought  would  be  OM"  cords.  Other  possible  prices  might  be  in- 
dicated on  the  diagram,  so  that,  in  general,  the  curve  DD'  (which 
we  may  call  the  demand  curve)  represents  the  relation  between 
price  and  the  amount  demanded.  The  rectangle  OM'P'A'  rep- 


VALUE   AND    PRICE  163 

resents  the  total  amount  the  community  pays  for  wood  when  the 
price  is  M'P',  just  as  the  rectangle  OM"P"A"  represents  the 
total  amount  paid  when  the  price  is  M"P".  It  often  happens 
that  this  total  value  is  less  when  the  price  is  low  than  when  the 
price  is  high,  although  the  amount  bought  at  the  lower  price  may 
be  double  or  treble  the  amount  that  would  be  bought  at  the  higher 
price.  This  means  not  only  a  better  satisfaction  of  wants  with  a 
smaller  expenditure  of  money,  but  also  that  more  money  is  avail- 
able for  the  purchase  of  other  things;  so  that  there  is  a  general 
lowering  in  the  margin  of  consumption  —  a  better  satisfaction  of 
wants  in  general.  If,  however,  the  relations  between  price  and 
demand  were  such  that  the  rectangle  OM"P"A"  would  be  larger 
than  the  rectangle  OM'P'A',  the  existence  of  the  lower  price 
would  necessitate  curtailing  expenditures  for  other  things.  This 
might  involve  only  a  decreased  use  of  substitutes  for  wood,  such 
as  coal;  more  often,  however,  it  would  mean  a  diminished  con- 
sumption of  a  number  of  other  things.  But  any  decrease  in  the 
price  of  any  commodity  of  general  consumption,  other  things  re- 
maining equal,  means  always  a  lowering  of  the  margin  of  con- 
Sumption  of  all  persons  increasing  their  use  of  the  commodity  in 
question.  For  the  lower  price  would  not  be  accompanied  by  the 
purchase  of  a  larger  amount  of  wood  if  the  additional  wood  did 
not  satisfy  more  intense  wants  than  would  other  things  that  might 
be  purchased  with  the  money. 

In  this  way  the  demand  for  any  one  commodity  is  affected  by 
the  demand  for  any  other  commodity.  The  competition  of  the 
market  thus  embraces  not  only  the  buying  and  selling  of  a  given 
commodity  (like  wood) ,  but  also  the  buying  and  selling  of  all  com- 
modities. In  this  sense  the  wood  dealers  compete  with  the  grocers 
and  the  tailors,  as  well  as  with  coal  dealers  and  with  each  other. 

The  Elasticity  of  Demand.  —  By  the  elasticity  of  demand  we 
mean  the  extent  to  which  the  amounts  demanded  vary  with  changes 
in  price.  In  every  family  in  poor  or  moderate  circumstances 
the  housewife  carefully  economizes  in  the  use  of  eggs  during 
periods  when  they  are  high  in  price,  using  them  more  freely  when 
the  price  is  lower.  In  such  a  case  the  demand  for  eggs  is  an  elastic 
one.  Relatively  inelastic  are  the  demands  of  most  families  for 


1 64 


OUTLINES   OF   ECONOMICS 


0 


FIG.  2 


such  things  as  flour  and  salt.    Other  commodities,  such  as  sugar, 

may  occupy  an  intermediate  position.  Figures  2  and  3  repre- 
sent, respectively, 
elastic  and  inelas- 
tic conditions  of 
demand.  With- 
out giving  further 
concrete  exam- 
ples, the  follow- 
ing propositions 
respecting  elas- 
ticity of  demand 
maybe  stated:  — 
(i)  Demand  for 
necessities  is  in 

general  less  elastic  than  demand  for  luxuries.     (2)   Demand  for 

commodities  the  use  of  which  constitutes  a  habit  is  less  elastic 

than  demand  for  commodi-      Y 

ties  the  use  of  which  is  gen- 
erally a  matter  of  conscious 

decision.       (3)     The     more 

adequate  the  substitutes  for 

a   particular  commodity  the 

more     elastic     will    be    the 

demand    for    it.      (4)    The 

demand  of   persons  of  large 

income   is  less   elastic    than 

that  of  persons  in   poor  or 

moderate  circumstances.    (5) 

A    corollary    of    proposition 

Jour  is  that  the   higher  the 

general    level   of    well-being 

in   a  community,  the  less  elastic  will  be  the  demand  for  most 

commodities. 

Consumers'  Surplus.  —  Whatever  the  price  of  a  competitively  produced 
commodity  may  be,  there  are  almost  always  some  buyers  who  would  have 
paid  more  if  it  had  been  necessary.  Referring  to  Figure  i,  if  the  price  is 


0 


M' 

FIG.  3 


VALUE  AND    PRICE  165 

M'P',  those  who  are  just  willing  to  pay  that  price,  who  would  either  have 
bought  less  or  bought  none  if  the  price  had  been  higher,  may  be  called  the 
marginal  buyers.  These  are  relatively  few  in  number,  however,  as  compared 
with  those  who  would  have  bought  even  if  the  price  had  been  higher.  The 
utility  of  the  marginal  purchases  to  the  buyers  is  but  little  more  than  the 
utility  of  other  things  that  could  have  been  bought  with  the  same  amount  of 
money :  in  such  cases  the  utility  of  the  purchase  only  about  equals  the  sacri- 
fice involved.  In  the  case  of  all  other  purchases,  however,  there  is  a  surplus 
of  utilty  over  costs  (whether  costs  are  measured  as  money  costs  or  as  the 
utility  of  the  other  possible  purchases  which  are  given  up)  which  is  called 
consumers'  surplus  (or  sometimes  consumers'  rent,  or  buyers'  gains).  It 
might  be  supposed  at  first  thought  that  if  the  price  were,  for  example,  M'P' 
(Fig.  i),  the  area  included  between  the  horizontal  line  A'P'  and  the  curve 
DP'  would  represent  consumers'  surplus.  This  is  not  exactly  true,  however, 
and  that  for  two  reasons:  in  the  first  place,  the  satisfaction  of  additional 
wants  which  a  lower  price  makes  possible  may  make  the  more  important 
wants  less  intense.  A  man  might  be  willing  to  give  ten  dollars  for  a  cord  of 
wood  in  order  that  at  least  one  room  in  his  house  could  be  heated  during  the 
winter.  He  might  also  be  willing  to  give  seven  dollars  a  cord  for  two  cords, 
so  as  to  heat  two  rooms,  but  the  heating  of  the  second  room  might  render  the 
heating  of  the  first  room  less  important  to  him.  He  might  not  be  willing, 
for  example,  to  give  ten  dollars  plus  seven  dollars  in  order  to  have  the  two 
rooms  heated.  In  the  second  place,  utility  itself  is  to  a  large  extent  affected 
by  price.  So  far  as  our  purchases  satisfy  what  has  been  called  the  desire  for 
distinction,  or  represent  what  Professor  Veblen  has  called  "conspicuous 
consumption,"  a  lowering  of  the  price  of  a  commodity  would  lessen  its  utility 
to  us.  The  successful  production  of  artificial  diamonds  at  a  low  cost  would 
lessen  the  desire  which  most  people  have  for  natural  ones.  If  touring  cars 
were  less  an  indication  of  one's  ability  to  spend  money  freely,  they  would  be 
less  esteemed  by  a  good  many  people.  On  the  other  hand,  it  might  occur  in 
some  cases  that  a  certain  amount  of  decrease  in  the  price  of  a  commodity, 
permitting  a  more  general  consumption  of  it,  would  increase  the  esteem  in 
which  it  is  held  by  those  who  are  glad  to  follow  fads.  In  general,  we  must  say 
that  even  if  we  had  absolutely  complete  statistics  of  the  actual  relation  of 
prices  to  demand,  consumers'  surplus  would  still  be  an  incommensurable 
thing.  It  is  nevertheless  a  real  thing,  and  is  especially  significant  as  con- 
stituting one  of  the  differences  between  real  income  and  money  incomes. 
It  should  be  noted,  however,  that  consumers'  surplus  relates  only  to  one's 
consumption  of  a  particular  commodity,  taken  by  itself,  for  as  we  have  seen, 
the  amount  which  we  are  willing  to  spend  in  the  purchase  of  any  one  com- 
modity depends  not  only  on  the  price  of  that  commodity,  but  also  on  the  price 
of  the  other  commodities  that  make  up  our  purchases.  The  surpluses  which 
a  consumer  gets  in  his  different  lines  of  consumption  cannot  be  added  to- 
gether to  form  a  total. 


1 66  OUTLINES   OF  ECONOMICS 

The  Nature  of  Supply.  — The  amount  of  goods  that  will  be  sup- 
plied in  a  given  market  at  a  given  time  depends,  like  the  amount 
demanded,  on  the  price.  "Forced  sales,"  in  which  goods  are 
offered  for  whatever  can  be  got  for  them,  form  about  the  only 
important  exception.  The  effect  of  price  on  supply  varies,  how- 
ever, according  to  the  length  of  time  that  is  taken  into  considera- 
tion. The  work  that  is  being  done  to-day  in  the  extension  of  old 
factories  and  the  building  of  new  ones,  the  construction  of  rail- 
ways, the  taking  up  of  new  land,  is  based  on  estimates  of  future 
prices,  the  present  prices  of  agricultural  and  manufactured  prod- 
ucts and  of  railway  transportation  being  of  significance  only  so 
far  as  they  indicate  what  future  prices  will  be.  The  merchant's 
stock  in  trade  is  bought  on  an  estimate  of  future  business  condi- 
tions; the  amount  of  land  the  farmer  allots  to  wheat  and  corn, 
respectively,  depends  on  his  estimate  of  the  relative  prices  the 
two  will  bring  after  the  harvest.  In  a  similar  way  the  amounts  of 
goods  that  can  be  supplied  to  the  market  to-day  are  limited  by 
the  estimates  which  business  men  and  farmers  have  made  in  the 
past  of  the  prices  which  buyers  are  willing  to  pay  to-day.  It 
would  be  possible,  though  not  necessary  for  our  purposes,  to  ana- 
lyze the  way  in  which  the  amount  of  the  capital  and  labor  which 
have  thus  been  applied  to  the  production  of  things  that  will 
satisfy  present  wants  was  partially  determined  by  conditions  which 
existed  still  farther  back  in  the  past,  and  so  on  in  an  indefinitely 
receding  series.  The  amount  of  goods  available  for  the  market 
of  to-day  is  thus  limited  not  only  by  past  estimates  and  conditions, 
but  also  by  present  estimates  of  future  conditions.  Every  seller 
has  the  option  of  selling  at  the  present  price  or  of  waiting  for 
possibly  higher  future  prices  —  an  option  which  is  limited  only  by 
the  perishability  of  his  goods  and  the  urgency  of  his  need  for 
money.  And  the  most  urgent  need  for  money  does  not  neces- 
sarily force  an  immediate  sale  if  his  opinion  as  to  the  future 
value  of  his  goods  is  a  reasonable  one,  for  in  this  case  it  is 
usually  easy  to  borrow  money  on  the  strength  of  the  marketable 
value  of  the  goods. 

The  Supply  Curve.  —  In  the  analysis  of  the  conditions  of  sup- 
ply existing  in  a  particular  market  at  a  particular  time  we  do  not 


VALUE   AND    PRICE 


167 


M 


M'   M" 
FIG.  4 


have  to  take  account  of  the  limitations  imposed  by  the  forms  which 
productive  efforts  have  taken  in  the  past.  At  any  given  time  a 
certain  definite  amount  of  a  commodity  is  available  for  the  market: 
this  forms  what  may  be  called 
the  potential  supply.  The  pro- 
portion of  this  potential  supply 
that  sellers  will  be  willing  to  part 
with  at  a  particular  time  will  de- 
pend primarily  on  the  prices  they 
can  get.  If  the  price  of  a  unit 
of  a  commodity  is  M' P'  (Fig.  4), 
the  sellers  will  be  willing  to  sell 
a  certain  number  of  units  of  it, 
which  may  be  represented  by 
OM'.  If  the  price  were  as  low  as  PM ,  however,  some  sellers 
would  prefer  to  wait  for  higher  prices,  the  amount  thus  withheld 
from  the  market  being  represented  by  MM'.  At  the  price  M"  P", 
however,  an  additional  supply  (M'M")  of  the  commodity  would  be 
forthcoming  from  sellers  who  were  not  tempted  by  the  price  M'P'. 
In  general,  the  supply  curve  SS'  represents  the  relations  between 
price  and  the  amount  that  will  be  supplied  in  a  particular  market 
and  at  a  particular  time. 

The  Determination  of  Price.  — The  foregoing  discussion  of  the 
TT  nature  of  demand  and 

of  supply  makes  it  pos- 
sible to  advance  another 
step  in  our  analysis  of 
the  determination  of 
price,  by  asking  our- 
selves what  will  be  the 
result  of  the  simultane- 
ous operation  of  the 

forces   of  demand  and 

f 

supply.  This  condition 
is  represented  graphic- 
ally in  Figure  5,  where  the  demand  curve  and  supply  curve  are 
combined  in  one  diagram.  If  the  curve  DD'  represents  the 


M' 


M 

FIG.  5 


1 68  OUTLINES   OF   ECONOMICS 

potential  demand  in  a  particular  market  at  a  particular  time,  and 
the  curve  SS'  represents  the  potential  supply,  the  price  which 
would  be  fixed  by  the  free  working  of  competitive  forces  would 
be  PM,  located  at  the  point  where  the  two  curves  cross.  At  this 
point  demand  and  supply  are  equal,  both  being  represented  by 
OM .  It  is  impossible  that  the  price  should  be  fixed  at  any  other 
point,  M' P',  for  example.  For  if  M"Q  be  drawn  so  as  to  equal 
M'  P',  it  will  be  evident  that  at  this  price  OM"  units  will  be  de- 
manded, while  only  OM'  units  will  be  supplied.  Most  of  the 
buyers,  however,  are  willing  to  pay  more  than  M'  P'  if  necessary, 
so  that  in  order  to  secure  their  share  they  will  bid  the  price  up 
until  the  supply  equals  the  demand.  This  is  what  John  Stuart 
Mill  meant  when  he  said  that  "value  always  adjusts  itself  in  such 
a  manner  that  the  demand  is  equal  to  the  supply,"  —  a  state- 
ment which  has  often  been  misinterpreted,  and  consequently  un- 
justifiably criticised. 

Producers'  Surplus.  —  Just  as  the  area  APD  (Fig.  5)  has  sometimes  been 
considered,  not  altogether  accurately,  to  represent  a  "  Consumers'  Surplus" 
(of  utility  over  costs)  ,  so  the  area  APS  has  been  considered  to  correspond  to 
what  has  been  called  "  Producers'  Surplus  "  or  "  Sellers'  Gains."  This  sur- 
plus should  not  be  thought  of  as  corresponding  to  the  actual  profits  of  the 
sellers;  that  is,  as  being  in  any  way  a  surplus  of  value  over  and  above  the 
expenses  of  production.  It  cannot  be  too  strongly  emphasized  that  the 
analysis  of  demand  and  supply  thus  far  presented  relates  only  to  the  condi- 
tions existing  in  a  particular  market  at  a  particular  time.  All  that  we  can  say 
is  that  when  OM  units  are  sold  at  the  price  of  MP  per  unit,  the  total  re- 
ceipts of  the  sellers  are  represented  by  the  rectangle  OMPA ;  while  the  area 
OMPS  represents  what  they  would  have  been  willing  to  sell  the  same 
amount  of  goods  for,  had  they  not  been  able  to  get  a  larger  return.  There 
is,  as  we  shall  see,  a  relation  between  the  prices  of  things  and  the  expense 
of  producing  them,  when  a  considerable  period  of  time  is  taken  into  con- 
sideration. At  any  given  time,  however,  sellers  are  mainly  governed  by  the 
relative  profitableness  of  selling  at  existing  prices  or  waiting  for  higher 
ones.  The  only  kind  of  surplus  which  the  area  APS  represents  is  an  intan- 
gible, hypothetical  thing. 

QUESTIONS 

1.  Is  there  such  a  thing  as  "intrinsic  value"?     What  is  usually  meant 
when  the  expression  is  used? 

2.  How  would  you  apply  the  concept  of  marginal  utility  to  a  non-divisible 
good,  like  a  house  ? 


VALUE   AND   PRICE  169 

3.  Does  the  tendency  of  each  individual  to  maintain  the  equilibrium  of 
his  margin  of  consumption  result  in  the  maximum  satisfaction  of  his  wants? 

4.  What  relation  is  there  between  the  amounts  which  a  college  student 
pays  for  room  rent,  for  food,  for  clothing,  for  books,  and  for  athletics  ? 

5.  Which  of  your  customary  purchases  would  you  still  make  if  prices 
were  doubled  ?     Which  would  you  curtail  ?     Which  would  you  omit  ? 

6.  Illustrate  the  propositions  relating  to  elasticity  of  demand  (p.  164)  by 
concrete  examples. 

REFERENCES 

BOHM-BAWERK,  E.  VON.      Positive  Theory  of  Capital,  Book  IV,  Chaps. 

I-VI. 

CARVER,  T.  N.     Distribution  of  Wealth,  Chap.  I. 

CUNYNGHAME,  HENRY.     Geometrical  Political  Economy,  Chaps.  Ill  and  IV. 
HADLEY,  A.  T.     Economics,  Chap.  III. 
HOBSON,  J.  A.     Economics  of  Distribution,  Chaps.  I  and  II. 
MARSHALL,  ALFRED.     Principles  of  Economics,  4th  ed.,  Book  III  and  Book 

V,  Chaps.  I  and  II.     Or   [abridged]  Economics  of  Industry,  3d  ed., 

Book  III  and  Book  V,  Chaps.  I  and  II. 

MILL,  J.  S.     Principles  of  Political  Economy,  Book  III,  Chaps.  I  and  II. 
WIESER,  F.  VON.     Natural  Value,  Book  II,  Chaps.  I-V. 


CHAPTER    XII 
VALUE   AND   PRICE   (Continued) 

SOME  of  the  most  important  factors  in  the  determination  of  ex- 
change values  are  not  revealed  by  an  analysis  of  the  conditions 
existing  at  a  particular  time.  We  have  assumed,  for  example, 
an  existing  potential  demand  and  an  existing  potential  supply, 
and  have  shown  how  these  result  in  the  equilibrium  of  actual 
demand  and  supply  at  a  certain  price.  An  explanation  of  why 
potential  demand  and  potential  supply  are  as  they  are  necessi- 
tates taking  a  considerable  period  of  time  into  consideration. 
The  demand  side  of  this  particular  problem  need  not  detain  us. 
It  has  already  been  suggested  that  demand  will  change  with 
changes  in  incomes,  tastes,  fashions,  and  the  like.  The  effect 
of  these  influences  is  so  obvious  that  it  may  be  taken  for  granted. 
With  reference  to  the  other  side  of  the  problem,  however,  it  has 
been  pointed  out  that  the  potential  supply  of  the  present  is  lim- 
ited by  conditions  set  by  past  industry.  The  amounts  of  dif- 
ferent kinds  of  consumption  goods  that  are  ready  for  present 
use  depends  upon  the  direction  which  the  work  of  production  has 
taken  in  the  past.  What,  in  the  long  run,  is  the  relation  between 
supply  and  value  ?  To  answer  this  question  we  shall  have  to 
push  our  analysis  somewhat  farther. 

Normal  Value.  — The  dominant  motive  that  guides  farmers  and 
business  men  in  their  investments  of  labor  and  capital  is  the  de- 
sire for  money  profits.  By  profits  we  mean  in  this  connection 
the  difference  between  the  expense  involved  in  producing  goods 
and  the  money  that  can  be  obtained  for  them.  If  it  were  always 
an  easy  matter  for  business  men  to  change  their  interests  and 
their  energies  from  one  line  of  production  to  another,  and  if 
capital  and  labor  could  likewise  be  freely  transferred  from  one 
undertaking  to  another,  it  is  hard  to  see  how  profits  in  any  one 
competitive  business  could  be  for  any  length  of  time  much  higher 

170 


VALUE   AND    PRICE 


171 


than  in  other  competitive  businesses.  Managerial  ability,  labor, 
and  capital  would  gravitate  always  toward  those  employments 
which  promise  the  greatest  profits.  The  effect  would  be  a  con- 
tinual tendency  toward  equality  of  advantage  in  different  lines 
of  business.  This  does  not  mean  necessarily  an  equality  of 
profits  as  between  individuals  in  any  given  line  of  business,  for 
the  amount  of  profits  depends  largely  upon  the  skill  and  enter- 
prise of  the  individual  business  man.  In  a  state  of  free  compe- 
tition, with  managerial  ability  as  free  in  its  selection  of  oppor- 
tunities as  we  have  assumed,  the  profits  of  any  business  would 
hardly  be  larger,  for  any  period  of  time,  than  the  business  man 
could  get  as  salary  by  working  for  others  —  for  if  working  for 
others  offered  a  greater  return  than  assuming  the  risks  of  busi- 
ness for  himself,  he  would  naturally  choose  the  salaried  position, 
and  -vice  versa.  Purely  competitive  profits,  under  conditions  of 
absolute  "fluidity"  of  business  ability,  of  labor,  and  of  capital, 
would  thus  tend  to  adjust  themselves  according  to  the  ability  of 
the  individual  business  man;  that  is,  to  equal  what  we  shall  later 
describe  as  the  "wages  of  management."  If  we  include  the 
value  of  the  business  man's  services  among  the  expenses  of  pro- 
duction, we  may,  obviously,  state  the  tendency  which  we  have 
described  as  a  tendency  toward  the  equality  of  the  prices  received 
for  the  products  of  any  particular  business  and  the  expenses  of 
producing  them. 

The  assumptions  we  have  made  do  not,  however,  exactly  cor- 
respond to  the  conditions  of  actual  business.  Managerial  ability, 
labor,  and  capital  are  all  specialized  to  a  greater  or  less  extent, 
so  that  they  cannot  be  changed  from  one  employment  to  another 
without  loss  of  efficiency.  But  it  is  not  necessary  for  the  valid- 
ity of  our  analysis  that  all  managerial  ability,  all  labor,  and  all 
capital  should  be  fluid  enough  to  change  from  industry  to  indus- 
try economically.  There  are  always  a  certain  number  of  business 
men  who  are  anxiously  watching  for  the  most  inviting  busi- 
ness opportunities;  there  is  always  a  certain  amount  of  labor 
awaiting  the  most  remunerative  employment,  and  there  is  always 
a  certain  amount  of  money  awaiting  investment  in  those  forms 
of  capital  goods  which  produce  the  greatest  value.  These  facts 


172  OUTLINES   OF  ECONOMICS 

are  enough  to  give  substantial  truth  to  the  statement  that  in  any 
competitive  industry  the  price  of  the  commodity  produced  tends 
to  equal  the  cost  of  producing  it.  When  the  price  of  bicycles 
was  high,  as  compared  with  the  expense  of  producing  them, 
existing  bicycle  factories  were  extended  and  new  ones  were  built. 
The  supply  of  bicycles  was  thus  so  increased  that  they  could  not 
be  sold  except  at  a  much  lower  price.  On  this  account  and  be- 
cause of  the  cessation  of  demand,  the  profits  in  the  manufacture 
of  bicycles  became  relatively  low,  and  many  former  bicycle  fac- 
tories are  now  used  for  other  purposes.  If  the  excess  of  the 
price  of  wheat  over  the  expense  of  producing  it  promises  to  be 
greater  than  the  excess  of  the  price  of  corn  over  the  expense  of 
producing  it,  farmers  will  raise  less  corn  and  more  wheat,  and  the 
result  will  be  higher  prices  for  corn  and  lower  prices  for  wheat. 

On  account  of  this  tendency  of  prices  to  equal  the  expenses  of 
production,  the  expense  of  producing  a  unit  of  a  commodity  is 
called  its  normal  value.  It  must  be  clearly  understood  that 
normal  values  relate  only  to  a  tendency  —  not  to  the  actual 
prices  of  the  market. 

Different  Conditions  of  Supply.  —  The  strength  of  the  tend- 
ency of  actual  competitive  values  to  equal  normal  values  depends 
upon  the  length  of  the  period  of  time  that  is  taken  into  considera- 
tion. The  longer  the  period  of  time,  the  larger  will  be  the  pro- 
portion of  managerial  ability,  labor,  and  capital  that  can  be  trans- 
ferred from  one  industry  to  another.  To  build  and  to  equip  new 
factories  and  to  extend  old  ones  takes  time;  the  supply  of  skilled 
labor  in  any  occupation  can  often  be  increased  but  slowly,  for 
many  trades  involve  an  apprenticeship  of  three  or  more  years. 
In  the  undertakings  that  are  becoming  less  profitable,  although 
capital  specialized  in  the  form  of  machines  may  not  be  useful  for 
other  purposes,  yet  such  machines  need  not  be  replaced  as  they 
wear  out;  while  a  skilled  laborer  cannot  take  up  another  trade 
without  loss  of  efficiency,  yet  the  incoming  supply  of  laborers 
may  begin  their  apprenticeship  in  those  occupations  in  which 
there  is  a  greater  demand  for  labor. 

While  the  conditions  of  long-period  supply  are  thus  such  as  to 
result  in  a  constant  tendency  toward  the  equalization  of  normal 


VALUE   AND   PRICE 


173 


value  and  market  value,  this  tendency  may  never  work  itself  out 
completely.  For  market  values  themselves  are  constantly  chang- 
ing under  the  influence  of  changing  demand.  The  goal  toward 
which  productive  effort  is  working  is  a  constantly  shifting  one. 
Moreover,  the  expense  of  production  itself  often  depends  upon 
the  amount  produced.  The  efforts  of  entrepreneurs  to  adjust 
production  to  prices  result  inevitably  in  a  readjustment  of  the 
conditions  that  determine  the  expenses  of  production.  Three 
forms  of  productive  undertaking  may  be  here  distinguished: 
those  in  which  increased  production  is  accomplished  with  in- 
creasing, decreasing,  or  constant  expense. 

If  transportation  facilities  and  other  controlling  conditions 
remain  constant,  the  amount  of  wheat  raised  in  the  United  States 
cannot  be  substantially  increased  without  resort  to  lands  less 
well  adapted  to  the  production  of  wheat,  or  the  more  intensive 
cultivation  of  lands  already  in  use.  Either  alternative  means 
(as  will  be  shown  in  a  later  chapter  in  more  detail)  the  use  of 
relatively  more  labor  and  capital  in  producing  the  additional 
wheat  than  was  required  for  the  wheat  produced  under  the  for- 
mer conditions.  This  fact  means  that  the  production  of  wheat 
cannot  be  substantially  increased  except  at  an  increased  expense 
per  bushel.  When  this  condition  of  increasing  expense  is  met 
with,  —  and  it  holds  true  generally  in  agriculture,  —  normal 
value  is  fixed  by  the  expense  of  production  of  the  most  expensive 
part  of  the  supply.  That  is,  normal  value  tends  to  equal  margi- 
nal expense.  If  the  price  of  the  product  is  not  high  enough  to 
repay  the  cultivation  of  the  poorest  lands  used,  they  will  cease  to 
be  cultivated.  If  the  price  of  the  product  is  appreciably  higher 
than  the  marginal  expense,  farmers  will  find  it  profitable  to  push 
cultivation  still  farther,  up  to  the  point  where  the  new  marginal 
expense  equals  the  price. 

In  many  manufacturing  and  commercial  businesses,  however, 
it  is  cheaper  to  produce  on  a  large  scale,  so  that  an  increase  in 
amount  produced  means  a  relatively  smaller  expense  per  unit  of 
product.  In  such  cases  a  general  increase  in  production  means 
a  decrease  in  the  normal  value  of  the  product.  At  any  definite 
time  a  given  product  will  be  produced  by  a  number  of  different 


174  OUTLINES   OF   ECONOMICS 

establishments  of  varying  grades  of  efficiency,  and  if  these  are  all 
to  continue  in  operation,  the  price  received  for  the  product  must 
be  sufficient  to  cover  the  expenses  of  production  of  the  least  effi- 
cient of  them.  It  is  the  supply  coming  from  these  least  efficient 
establishments  that  adjusts  itself  most  accurately  to  changes  in 
price.  From  this  point  of  view,  we  may  say  that  in  manufac- 
tures, as  in  agriculture,  normal  values  equal  marginal  expenses. 
But  this  fact  is  not  very  significant,  for  as  soon  as  we  take  a  longer 
period  of  time  into  consideration,  we  recognize  that  the  higher 
price  which  enables  the  marginal  establishment  to  produce  at 
all,  also  enables  the  better  establishments  to  produce  on  a  larger 
scale.  The  reduced  expenses  of  production  necessitate,  through 
competition,  a  lowering  of  the  price,  and  the  less  efficient  estab- 
lishments find  themselves  forced  out  by  the  very  conditions  that 
permitted  them  to  produce  at  all.  From  the  long-time  point  of 
view,  it  is  minimum,  rather  than  maximum,  expenses  of  produc- 
tion that  measure  normal  values  in  industries  of  decreasing  ex- 
penses. There  is  by  this  process  a  continual  elimination  of  the 
inefficient  producers  and  a  continual  insistence  upon  higher  stand- 
ards of  efficiency  on  the  part  of  the  superior  producers.  The 
minimum  expenses  of  production  to-day  become  the  marginal 
expenses  of  production  to-morrow. 

The  condition  of  decreasing  expenses  dominates  in  most  of  the 
great  factory  industries  of  the  present.1  Its  effect  is  sometimes 
offset  by  the  increased  cost  of  raw  material  produced  under  con- 
ditions of  increasing  expenses.  The  diminution  of  expenses 
which  accompanies  an  increase  in  the  amount  of  the  business  is 
of  special  significance  in  railway  transportation,  and  in  a  number 
of  other  monopolistic  businesses.  The  telephone  business,  how- 
ever, is  alleged  to  be  subject  to  conditions  of  increasing  expenses. 
Some  writers  hold  that  the  dominance  of  the  condition  of  de- 
creasing expenses  in  any  business  is  enough  to  make  it  monopo- 
listic in  tendency. 

In  many  hand  industries,  such  as  tailoring  and  cigar  making, 
the  expense  of  production  per  unit  does  not  vary  to  any  great 

1  Some  qualifications  of  this  statement  are  suggested  in  the  following  section 
on  "Constant  and  Variable  Expenses." 


VALUE   AND    PRICE 


FIG.  i 


extent  with  the  amount  produced.  Figures  i,  2,  and  3  illustrate 
supply  under  the  conditions  of  increasing,  decreasing,  and  con- 
stant expenses,  respectively :  — 
These  diagrams  illustrate  the 
relations  between  price  and 
supply  when  a  considerable 
period  of  time  is  taken  into 
account  and  must  be  carefully 
distinguished  from  the  supply 
curve  described  in  the  preced-  »j 
ing  chapter,  which  related 
only  to  the  conditions  of 
supply  at  a  particular  time. 
The  "supply"  illustrated  in 
these  long-period  supply 
curves  is  about  the  same  as 
the  "potential  supply"  of 
the  preceding  chapter. 

Constant  and  Variable  Ex- 
penses. — There  is  no  better 
illustration  of  the  necessity 
of  keeping  definite  periods  of 
time  in  mind  when  discussing 
problems  relating  to  valuation  r 
than  that  furnished  by  the 
problem  of  the  apportionment 
of  specific  expenses  of  produc- 
tion to  particular  units  of 
products.  In  almost  any 
industrial  establishment,  any 
increase  in  product  will  be 
attended  by  some  specific  in- 


£1 

P' 

MM'                    A 
FIG.  a 

P' 


M 


M' 

FIG.  3 


crease  in  expenses:    more  raw 

material  and  more  labor  will 

be  used,  possibly  more  power;  although  the  increased  expenses 

for  labor  and  power  may  not  be  proportionate  to  the  increase 

in  production.     Such  expenses  are  called  •variable  expenses,  and 


176 


OUTLINES   OF  ECONOMICS 


are  to  be  contrasted  with  constant  expenses,  which  remain 
approximately  the  same,  no  matter  what  the  amount  pro- 
duced is.  The  interest  on  the  capital  invested  in  the  factory 
building  and  its  equipment  of  machinery  is  a  constant  expense; 
the  expense  of  management  and  general  office  expenses  will  be 
increased  but  slightly  by  an  increase  in  the  annual  product  of  an 
establishment.  It  is  often  assumed  that  wherever  only  a  part 
of  the  expenses  varies  with  the  amount  produced,  the  industry  is 
ipso  facto  one  of  decreasing  expenses.  Whether  this  assumption 
holds  true  or  not  depends  on  the  length  of  the  period  of  time  we 
take  into  consideration.  It  is  true  that  factories  are  built  with 
a  certain  maximum  capacity,  and  until  that  maximum  capacity 
is  utilized,  production  may  be  increased  without  a  proportionate 
increase  in  expenditure.  When  the  maximum  is  reached,  how- 
ever, more  equipment,  and  often  more  buildings,  will  be  needed 
before  there  can  be  a  further  increase  in  product.  There  is  often 
a  certain  most  efficient  size  of  plant;  an  increase  in  business  be- 
yond the  capacity  of  the  most  efficient  size  of  plant  necessitates 
either  a  curtailing  of  the  business  or  a  duplication  of  the  plant. 
When  business  conditions  are  such  as  to  warrant  temporarily 

pushing  the  output 
of  a  plant  beyond 
its  normal  capacity, 
the  result  usually 
is,  as  every  manu- 
facturer knows,  that 
this  increased  out- 
put is  produced  at 
relatively  increased 
expenses  of  produc- 

O1 jf j/"^ X    tion.    Many  seem- 

FIG.  4  ingly    constant 

expenditures     (like 

interest  on  the  cost  of  the  plant)  are  variable  in  the  long  run. 
Such  expenditures  increase,  but  only  at  considerable  intervals 
of  time.  A  supply  curve  corresponding  to  the  conditions  of 
production  in  such  a  business  might  be  something  like  Figure  4. 


VALUE  AND   PRICE  177 

When  the  product  reaches  OM  units,  and  again  when  it  reaches 
OM'  units,  fresh  investments  of  large  amounts  of  capital  are  neces- 
sary. From  the  long-time  point  of  view,  such  a  business  might 
very  possibly  be  one  of  approximately  constant  expenses;  although 
of  course  the  other  economies  of  large-scale  production  may  be 
sufficient  to  bring  them  under  the  rule  of  decreasing  expenses. 
The  problem  which  the  economist  has  to  deal  with  here  is  analo- 
gous to  the  difficult  one  which  the  accountant  has  to  face  in  fac- 
tory cost  keeping.  Careful  analysis  of  the  relations  of  constant 
and  variable  expenses  in  different  modern  businesses  must  pre- 
cede any  broad  generalization. 

Joint  Expenses  of  Production.  —  When  the  production  of  one 
commodity  is  inevitably  accompanied  by  the  production  of  one 
or  more  other  commodities,  it  is  often  impossible  to  assign  a  defi- 
nite part  of  the  total  expense  of  production  to  any  one  of  the  com- 
modities. It  is  obviously  impossible  to  separate  the  expenses 
of  producing  tenderloin  steaks  from  the  expenses  of  producing 
soup  bones,  or  either  one  of  these  from  the  expenses  of  producing 
hides.  Mutton  and  wool,  cotton  and  cotton  seed,  coal  gas  and 
coke,  are  familiar  examples  of  commodities  produced  under 
conditions  of  joint  expense.  Modern  methods  for  the  utilization 
of  industrial  by-products  have  greatly  increased  the  list  of  com- 
modities produced  under  conditions  of  joint  expense.  Such  com- 
modities have  only  a  collective  normal  value,  which  is  equal  to 
the  joint  expenses  of  production.  The  potential  supply  is  governed 
by  the  total  price  which  the  producer  thinks  he  can  get  for  the 
joint  products,  as  compared  with  the  joint  expenses  of  produc- 
ing them.  The  division  of  the  total  price  into  specific  prices  for 
the  separate  commodities  is  determined  by  the  potential  supply 
and  by  the  conditions  of  demand  that  exist  at  any  one  time  for 
the  separate  products. 

The  Surplus  of  Bargaining.  —  Demand  and  supply  do  not  al- 
ways fix  price  at  a  definite  point.  The  price  of  horses  of  any 
given  grade,  for  example,  is  fixed  only  approximately  by  market 
conditions.  In  the  sale  of  a  horse  there  is  room  for  consider- 
able latitude  of  opinion  as  to  the  price  that  should  be  paid.  If 
the  lowest  price  that  the  seller  will  take  is  considerably  below 


178  OUTLINES   OF  ECONOMICS 

the  highest  price  that  the  buyer  will  give,  just  where  between 
these  limits  the  actual  price  will  be  finally  fixed  will  depend 
upon  the  relative  skill  at  bargaining  of  the  seller  and  buyer.  In 
the  case  of  a  horse  trade,  this  opportunity  for  the  "higgling  of 
the  market"  has  become  proverbial,  but  in  many  other  kinds 
of  exchanges  the  efficient  bargainer  has  an  opportunity  to  get 
for  himself  a  surplus  above  his  minimum  selling  price,  or  below 
his  maximum  buying  price.  Real  estate  transactions  furnish 
a  good  example.  In  the  case  of  the  great  commodities  of  the 
world  market,  like  wheat,  cotton,  and  iron,  the  price  is  set  so 
accurately  by  market  conditions  that  the  gains  of  bargaining 
are  relatively  small.  In  general,  the  wider  the  market,  the  more 
general  the  use  of  the  commodity,  the  greater  the  ease  with  which  the 
commodity  can  be  sorted  into  standard  grades  (as  in  the  case  of 
wheat  and  cotton),  the  more  accurately  will  competitive  forces  fix  a 
definite  price.  Goods  which  cannot  be  standardized,  each  unit  of 
which  possesses  some  unique  qualities,  give  most  scope  for  the  varia- 
tions in  the  valuations  of  individual  buyers  and  sellers.  In  such 
cases  supply  and  demand  do  not  fix  a  price  point,  but  only  cer- 
tain limits  within  which  the  price  must  fall.  The  widening  of 
the  market,  however,  and  the  increasing  standardization  of 
commodities  —  an  effect  of  machine  production  —  are  bringing 
a  larger  and  larger  proportion  of  goods  into  the  field  where  the 
uniform  market  valuations  dominate. 

Non-reproducible  Goods.  —  Some  economic  writers  have  made 
a  special  class  of  such  goods  as  great  works  of  art.  These  are 
absolutely  unique,  in  that  no  copy  can  have  anything  like  the 
value  of  the  original.  The  price  of  such  non-reproducible  goods 
has  an  upper  limit  fixed  by  the  highest  subjective  valuation  set 
upon  it  by  any  possible  buyer.  The  lower  limit  will  be  either 
the  seller's  own  subjective  valuation,  or  the  second  highest  valu- 
ation set  by  any  competing  buyer,  according  as  one  or  the  other 
of  these  two  is  the  higher.  Between  the  upper  and  lower  limit 
the  exact  fixing  of  the  price  is  a  matter  of  pure  bargaining.  Such 
cases  should  not  be  confused  with  ordinary  monopoly  price,  as 
has  been  done  by  some  writers.  The  products  of  almost  all  the 
industrial  handicrafts,  as  well  as  the  products  of  the  avowedly 


VALUE   AND    PRICE 


I79 


artistic  pursuits,  possess  a  non-reproducible  element  of  individ- 
uality, that  removes  them  to  a  greater  or  less  extent  from  the 
operations  of  the  law  of  normal  value.  A  commodity  may  pos- 
sess this  quality  of  uniqueness  to  such  an  extent  that  it  is  not 
affected  at  all  by  the  forces  determining  the  value  of  the  general 
class  of  goods  to  which  it  belongs,  and  in  this  case  its  owner  may 
be  said  to  have  a  monopoly  of  it.  But  it  is  better  to  look  upon 
the  valuations  of  such  non-reproducible  goods  as  determined  by 
individual  valuations  and  the  process  of  bargaining.  The  "nor- 
mal "  price  of  such  goods  is  simply  the  highest  price  that  can  be 
got  for  them  —  a  statement  which  does  not  hold  true  of  most 
monopoly  goods.  For  monopoly  goods  are  not  necessarily  unique 
or  non-reproducible.  They  differ  from  ordinary  competitive 
goods,  however,  in  that  they  cannot  be  reproduced  except  by 
the  monopolist. 

Monopoly  Values. — The  subject  of  monopoly  price  will  be 
discussed  in  connection  with  an  analysis  of  the  general  subject 
of  monopoly  in  a  later  chapter.  It  is  sufficient  in  this  connection 
to  note  that  the  monopolist  gets  a  special  power  over  the  price 
of  his  product  through  his  ability  to  control  the  supply  of  it. 
The  monopolist,  like  any  other  seller,  seeks  to  get  the  price  that 
yields  the  greatest  net  returns,  but  unlike  the  competitive  seller, 
he  is  not  hampered  by  an  inability  to  fix  the  price  very  much 
above  the  cost  of  production. 

Retail  Prices. — The  retail  prices  paid  by  the  individual  con- 
sumer do  not  always  respond  to  the  variations  in  wholesale  prices 
brought  about  by  changes  in  supply  and  demand.  There  are 
sometimes  tacit  or  explicit  local  price  agreements  between  local 
merchants,  which  apply  even  to  competitively  produced  goods. 
Some  retailers  consistently  sell  a  few  kinds  of  goods  at  less  than 
cost  to  attract  custom  for  the  goods  on  which  they  may  make  a 
profit.  Merchants  who  make  a  specialty  of  a  high  class  of  goods, 
and  thus  cater  to  a  wealthy  clientele,  are  apt  to  exact  higher  prices 
for  ordinary  goods  than  do  those  merchants  who  have  to  deal  with 
a  poorer  class  of  customers.  Custom  has  more  effect  on  retail 
than  on  wholesale  prices.  The  prices  of  various  articles  sold  as 
"men's  furnishing  goods"  form  a  good  example  of  the  influence 


l8o  OUTLINES   OF   ECONOMICS 

of  custom.  Retail  prices  are  also  governed  by  the  value  of  the 
coins  that  are  in  general  use,  and  are  generally  expressed  in 
round  numbers.  In  the  long  run,  demand  and  supply  govern 
retail  prices,  but  they  do  not  set  a  definite  price  point  so  accu- 
rately as  they  do  in  the  case  of  wholesale  prices. 

Public  Authority  and  Value.  —  In  the  middle  ages  there  was 
considerable  speculation  by  theologians  and  legists  about  the 
subject  of  "just  price"  —  the  value  at  which  things  ought  to 
exchange  for  other  things.  This  idea  denotes  an  important 
difference  between  the  mediaeval  and  modern  concept  of  value. 
Professor  Ashley  has  put  it  clearly  in  these  words:  "With  Aqui- 
nas, the  greatest  of  the  mediaeval  schoolmen,  it  [value]  was  some- 
thing objective;  something  outside  of  the  will  of  the  individual 
purchaser  or  seller;  something  attached  to  the  thing  itself,  exist- 
ing whether  he  liked  it  or  not,  and  that  he  ought  to  recognize. 
And  as  experience  showed  that  individuals  could  not  be  trusted 
thus  to  admit  the  real  value  of  things,  it  followed  that  it  was  the 
duty  of  the  proper  authorities  of  state,  town,  or  gild  to  step  in 
and  determine  it,  and  what  the  just  and  reasonable  price  really 
was."  This  "just  and  reasonable  price"  was  very  often  thought 
to  be  that  price  which  would  afford  a  reasonable  compensation 
for  the  labor  of  the  producer.  When  in  more  modern  times 
theological  speculations  began  to  yield  precedence  to  inquiries 
into  "natural  laws,"  the  idea  of  just  price  was  supplanted  by 
the  idea  of  "natural  price."  Sometimes  this  was  interpreted  as 
determined  by  the  value  of  the  labor  put  into  a  commodity  (this 
was  the  dominant  idea  during  the  eighteenth  century),  but  the 
growth  of  capitalistic  production  necessitated  the  recognition  of 
the  other  elements  in  the  expense  of  producing  a  commodity  as 
part  of  its  natural  value.  Modern  economic  science,  as  we  have 
seen,  applies  the  term  "normal  value"  to  the  expense  of  produc- 
ing a  thing,  but  interprets  it  only  as  an  important  factor  control- 
ling the  long-period  fluctuations  of  competitive  exchange  value. 
The  adjective  "natural,"  with  its  misleading  implications,  has  been 
abandoned.  Yet  the  competitive  system  is  to-day  so  thoroughly 
accepted  as  the  "natural"  economic  order,  that  there  is,  as  we 
have  previously  noted,  a  deep-seated  conviction  that  normal 


VALUE   AND   PRICE'  l8l 

competitive  prices  (measured  by  the  expenses  of  production) 
are  natural  and  just  prices.  This  conviction  is,  however,  brought 
face  to  face  with  the  fact  of  the  growth  of  a  large  industrial  field 
in  which  monopoly,  rather  than  competition,  rules.  The  ques- 
tion of  just  price  is  again  a  live  issue  —  as  it  was  before  the  growth 
of  the  competitive  system.  Public  authority  is  frequently  invoked 
to  insure  that  the  prices  fixed  by  holders  of  municipal  franchises 
and  other  monopolists  are  just  and  reasonable.  The  chief  fun- 
damental test  which  our  courts  are  able  to  apply  to  the  reason- 
ableness of  any  particular  price  is  its  conformity  to  what  the  price 
would  have  been  under  competitive  conditions.  Thus  it  is  often 
asked  if  a  particular  monopoly  charge  gives  a  more  than  normal 
return  upon  the  capital  invested.  The  determination  of  what 
the  expense  of  producing  a  particular  commodity  or  service  really 
is,  is  often  a  difficult,  or  even  impossible,  task  (the  distinction 
between  constant  and  variable  expenses  being  frequently  a  stum- 
bling-block), but,  given  the  general  acceptance  of  the  competi- 
tive system,  it  is  hard  to  see  what  other  standard  could  be  used. 
Moreover,  the  general  consensus  of  recent  court  decisions  is  that 
the  Fifth  and  Fourteenth  Amendments  to  the  Federal  Constitu- 
tion, prohibiting  the  taking  of  property  without  due  process  of 
law,  prevent  federal  and  state  governments  from  going  farther 
than  this  in  the  regulation  of  monopoly  charges.1  And  even  this 
power  is  not  conceded,  except  in  the  case  of  businesses  affected 
with  a  distinct  public  interest,  such  as  those  conducted  by  so- 
called  public-service  corporations.  In  fixing  prices  for  its  own 
services,  such  as  postal  charges,  the  government  is  controlled  by 
other  considerations.  These  will  be  discussed  in  the  chapters 
on  public  finance. 

Imputed  Value.  — The  only  things  to  which  market  valuations 

1  It  is  the  view  of  some  courts  that  not  only  concrete  physical  objects,  but  also 
the  "franchise  value"  that  has  resulted  from  the  ability  of  a  company  to  charge 
monopoly  prices  in  the  past  must  be  counted  as  "property"  in  the  meaning  of  the 
Constitution.  So  far  as  this  view  governs  the  public  regulation  of  monopoly 
prices,  it  is  impossible  to  reduce  them  to  a  competitive  standard.  It  should  be 
possible,  however,  in  any  particular  case,  to  prevent  any  increase  in  this  acquired 
franchise  value;  that  is,  to  subject  public-service  monopolies  to  competitive 
standards  so  far  as  the  increase  of  their  earnings  is  concerned. 


1 82  OUTLINES   OF  ECONOMICS 

actually  apply  are  the  specific  units  of  goods  that  are  actually 
bought  and  sold.  We  are  accustomed,  however,  to  impute  these 
market  values  to  all  other  existing  goods  of  the  same  kinds.  When 
wheat  is  sixty  cents  a  bushel,  the  only  bushels  of  wheat  actually 
valued  by  the  market  at  that  price  are  the  ones  actually  sold  at 
that  price.  Yet  we  impute  or  ascribe  the  same  value  to  all  other 
bushels  of  the  potential  supply  of  wheat  in  the  same  market.  It 
is  obvious  that  all  of  the  potential  supply  could  not  be  sold  at  once 
except  at  a  very  much  lower  price.  Any  seller  could,  however, 
add  a  small  amount  to  the  supply,  without  materially  affecting 
the  price.  Exchange  value,  as  a  concrete  fact,  emerges  only  in 
the  actual  process  of  exchange.  The  value  imputed  to  goods 
not  in  the  actual  process  of  exchange  is  a  hypothetical  value: 
the  price  which  could  be  obtained  for  any  particular  unit  of  a 
good  under  existing  market  conditions.  This  concept  of  im- 
puted value  in  economics  is  in  some  ways  like  the  concept  of 
potential  energy  in  physics.  A  body  of  a  given  mass  raised  a 
certain  distance  above  the  earth  has  a  certain  amount  of  poten- 
tial energy,  which,  if  the  body  be  allowed  to  fall,  will  be  realized 
in  an  equivalent  amount  of  actual  energy.  To  make  the  analogy 
between  potential  energy  and  potential  value  complete,  how- 
ever, one  would  not  only  have  to  conceive  of  the  force  of  gravi- 
tation as  continually  fluctuating,  but  also  to  imagine  that  the 
amount  of  actual  energy  realized  would  be  relatively  diminished 
according  to  the  mass  of  the  number  of  the  bodies  let  fall  at  any 
particular  time. 

Notwithstanding  the  hypothetical  nature  of  this  imputed 
value,  it  is  often  treated  as  though  it  were  a  real  thing.  Statis- 
tical attempts  to  state  the  wealth  of  a  nation  in  terms  of  dollars 
and  cents  are  only  estimates  of  the  sums  of  these  potential  values, 
and  involve  the  hypothesis  stated  above.  A  merchant's  inven- 
tory of  his  stock  in  trade  is  often  accompanied  by  an  estimate 
of  its  potential  value.  Whether  this  value  will  be  realized  or 
not  depends  upon  the  constancy  of  business  conditions,  the  ca- 
prices of  fashion,  and  whether  it  can  be  sold  in  the  regular  course 
of  trade  or  whether  it  has  to  be  disposed  of  at  a  forced  sale.  A 
good  many  kinds  of  consumption  goods,  such  as  household  fur- 


VALUE   AND    PRICE  183 

niture,  are  not  customarily  thought  of  by  the  owner  in  terms  of 
exchange  value.  It  is  often  necessary  for  purposes  of  taxation 
to  ascribe  value  to  them,  but  it  should  be  remembered  that  this 
imputed  value  is  purely  hypothetical. 

The  Valuation  of  Production  Goods. — In  our  analysis  of  ex- 
change value  it  has  been  assumed  that  the  commodities  valued 
were  wanted  by  consumers  for  the  satisfaction  of  their  wants; 
that  is,  that  they  were  consumption  goods.  It  is  possible  to 
say  that  producers'  goods  —  capital  and  land  —  have  a  mar- 
ginal utility  for  the  producers,  which  measures  the  importance 
attached  to  the  possession  of  them.  While  one  could  thus,  with 
substantial  accuracy,  include  producers'  goods  in  the  scope  of 
the  foregoing  analysis,  there  is  a  more  instructive  way  of  ap- 
proaching the  problem  of  the  valuation  of  land  and  capital.  Con- 
sumption goods  have  value  because  they  satisfy  human  wants; 
that  is,  they  yield  an  income  of  satisfactions,  while  production 
goods  are  valued  because  they  have  the  power  of  gaining  a  money 
income  for  the  owner.  Just  as  the  value  of  consumers'  goods 
varies  with  the  intensity  of  the  wants  they  satisfy,  so  the  value 
of  producers'  goods  varies  with  their  power  to  yield  a  money 
income.  The  valuation  of  producers'  goods  will,  accordingly, 
be  discussed  in  the  chapters  on  the  rent  of  land  and  interest. 

Other  Theories  of  Value.  — The  older  economists  used  to  em- 
phasize the  relation  between  the  value  of  a  thing  and  the  amount 
or  the  expense  of  the  labor  spent  in  producing  it,  —  a  relation 
much  closer  under  the  old  methods  of  hand  production  than  it 
is  at  present.  The  development  of  a  systematic  labor  theory 
of  value  was,  however,  the  work  of  Karl  Marx,  the  founder  of 
modern  "scientific"  socialism.  This  theory  is,  in  essence,  that 
labor  produces  all  value  and  that  the  interest  on  capital  and  the 
rent  of  land  are  deductions  from  the  real  wages  of  labor  —  de- 
ductions that  are  made  possible  only  by  the  existence  of  the  sys- 
tem of  private  property  in  producers'  goods.  It  is  so  obvious 
that  things  do  not  exchange  to-day  in  proportion  to  the  amount 
of  labor  involved  in  producing  them,  that  to  point  this  out  in  de- 
tail, as  some  economists  have  done,  is  unnecessary.  Karl  Marx 
reallv  meant  that  labor  costs  constitute  the  "natural"  values 


1 84  OUTLINES   OF   ECONOMICS 

of  things,  or  the  ratios  at  which  they  ought  to  exchange.  But 
the  only  "natural"  values  that  can  be  recognized  from  the  mod- 
ern scientific  point  of  view  are  the  values  that  really  exist  —  the 
actual  values  of  the  market.  Nor  can  we  say  that  things  ought 
to  exchange  in  proportion  to  their  labor  costs,  without  begging 
the  whole  question  in  favor  of  the  abolition  of  private  property 
in  land  and  capital.  Moreover,  it  will  be  shown  later  that  rent 
and  interest  would  not  be  eliminated,  although  they  might  be 
changed  in  form,  by  a  change  from  private  to  common  owner- 
ship of  producers'  goods.  Although  the  labor  theory  of  value 
is  still  held  by  many  followers  of  Marx,  its  place  in  the  creed  of 
scientific  socialism  is  diminishing  in  importance. 

The  relation  between  value  and  the  expenses  of  production 
has  sometimes  been  stated  in  such  a  way  as  to  lead  to  the  infer- 
ence that  cost  of  production  is  the  cause  of  value.  The  cost  of 
production  theory  of  value,  when  so  stated,  is  open  to  much 
the  same  objections  as  the  labor  theory.  Suppose  I  perfect  a 
machine  at  the  expense  of  ten  thousand  dollars  which  will  blow 
soap  bubbles  at  the  rate  of  a  thousand  an  hour.  Will  it  be  worth 
ten  thousand  dollars  ?  Certainly  not ;  but  why  not  ?  The  theory 
of  costs  will  not  explain  it.  To  say  that  the  labor  and  materials 
have  not  been  wisely  used  is  simply  to  say  that  the  machine  has 
no  value,  which  is  just  what  we  are  trying  to  explain.  As  a 
fact,  it  is  not  worth  ten  thousand  dollars  simply  because  no  one 
is  willing  to  give  ten  thousand  dollars  for  it.  The  expenses  of 
production  do  not  create  value,  but  there  is  a  sense  in.  which 
value  is  the  cause  of  the  expenses  of  production.  That  is,  men 
think  it  worth  while  to  expend  money  in  producing  things  be- 
cause they  think  that  the  products  will  have  value  enough  to 
recompense  them  for  the  expenses  of  production. 

Many  of  the  economists  who  have  written  in  the  past  about 
the  subject  of  value  took  the  facts  of  demand  for  granted,  and 
devoted  most  of  their  treatment  of  the  subject  to  an  examina- 
tion of  the  relation  between  value  and  the  expenses  of  produc- 
tion. This  was  in  part  an  expression  of  a  general  tendency  to 
regard  the  production  of  wealth  as  something  to  be  desired  for 
its  own  sake;  the  fact  that  the  satisfaction  of  human  wants  is 


VALUE   AND    PRICE  185 

the  real  goal  of  most  economic  efforts  being  underemphasized. 
In  more  recent  years  economic  writers  have  developed  the  analy- 
sis of  human  wants;  the  fact  that  utility  in  the  economic  sense 
is  not  utility  in  general,  but  the  utility  of  a  particular  unit  of  a 
commodity,  being  the  most  significant  point  in  this  new  analysis. 
Some  writers  have  even  gone  so  far  as  to  take  the  facts  of  supply 
for  granted,  and  to  assume  that  value  is  explained  when  mar- 
ginal utility  is  described.  Marginal  utility  is,  as  we  have  seen, 
the  equivalent  of  subjective  value  —  the  importance  an  indi- 
vidual attaches  to  the  possession  of  a  particular  unit  of  a  com- 
modity. To  say  that  the  marginal  utility  of  an  object  determines 
its  exchange  value  is,  however,  to  argue  in  a  circle,  for  the  mar- 
ginal utility  of  a  commodity  to  me  depends  on  the  intensity  of 
my  wants  and  the  extent  to  which  they  are  satisfied.  But  the 
extent  to  which  our  wants  are  satisfied  depends  very  largely  upon 
the  difficulty  or  expense  of  acquiring  the  things  that  satisfy  them. 
In  this  sense  value  determines  marginal  utility.  The  concept 
of  marginal  utility  does,  however,  aid  us  in  understanding  the 
causes  of  exchange  value,  because  it  forms  a  bridge  by  which 
we  can  pass  from  the  definite  money  units  in  which  exchange 
values  are  measured  to  the  indefinite,  subjective  units  of  satis- 
faction in  which  we  measure  the  utility  of  goods. 

As  a  determining  cause  of  value,  utility  has  a  logical  priority 
over  scarcity,  in  the  sense  that  demand  is  usually  the  cause  of 
supply.  Yet  in  the  analysis  of  the  actual  valuation  process  we 
have  to  recognize  that  utility  and  scarcity,  demand  and  supply, 
are  forces  operating  simultaneously,  neither  of  which  can  be 
neglected  without  obscuring  the  fundamental  facts  of  the  market. 

QUESTIONS 

1.  Is  there  any  relation  between  the  price  of  a  lead  pencil  and  the  expense 
of  producing  it  ? 

2.  What  elements  of  a  farmer's   expenses   are  "constant"?    What  are 
"  variable"  ? 

3.  What  different  possible  standards  of  just  price  can  you  suggest  ? 

4.  Draw  diagrams  illustrating  the  fixing  of  normal  value  under  different 
conditions  of  long-period  supply,  the  conditions  of  demand  being  assumed  to 
be  constant. 


l86  OUTLINES    OF   ECONOMICS 

5.  What  different  possible  meanings  can  be  attached  to  the  expression 
''natural  value"  ? 

6.  Discuss  the  following  statement :  — 

"The  fact  is  that  labor  once  spent  has  no  influence  on  the  future  value  of  any 
article ;  it  is  lost  and  gone  forever.  In  commerce  bygones  are  forever  by- 
gones ;  and  we  are  always  starting  clear  at  each  moment,  judging  the  value 
of  things  with  a  view  to  future  utility."  Jevons,  Theory  of  Political  Econ- 
omy, p.  164. 

REFERENCES 

FLUX,  A.  W.     Economic  Principles,  Chaps.  IV  and  V. 

MARSHALL,  ALFRED.     Principles  of  Economics,  4th  ed.,  Book  V,  Chaps.  Ill, 

IV,  V,  VI,  VII,  XI,  XII.      Or   [abridged],   Economics  of  Industry,  3d 

ed.,  Book  V,  Chaps.  III-VIII. 

MILL,  J.  S.     Principles  of  Political  Economy,  Book  III,  Chaps.  Ill  and  IV. 
SELIGMAN,  E.  R.  A.     Principles  of  Economics,  Chaps.  XVI,  XVII. 
WIESER,  E.  VON.     Natural  Value,  Book  V,  Chaps.  I-VI. 


CHAPTER    XIII 
MONOPOLY 

The  Idea  of  Monopoly.  —  One  of  the  economic  terms  most  fre- 
quently used  nowadays  is  monopoly,  and  at  the  same  time  it 
is  one  of  those  terms  which  are  peculiarly  vague  and  ill-defined 
in  popular  discussion.  Even  in  law  and  economics,  contradictory 
meanings  have  been  attached  to  the  term,  although  recently  there 
has  been  a  marked  clarification  of  thought  both  on  the  part  of 
economists  and  jurists.  This  has  been  a  natural  result  of  the 
discussion  of  the  subject;  and  this  discussion  in  turn  has  been  a 
necessary  outcome  of  an  economic  situation  in  which  monopoly 
has  played  and  is  still  playing  a  large  r61e.  While  there  has  been 
confusion  of  thought  with  respect  to  monopoly,  all  have  agreed  that 
something  to  be  called  monopoly  has  existed,  and  that  it  has  been 
the  cause  of  perplexing  scientific  and  practical  problems. 

In  economics,  as  in  life,  categories  shade  off  into  each  other,  and 
at  the  boundaries  discrimination  is  difficult.  It  is  best,  therefore, 
to  find  highly  developed,  plainly  marked  types  to  furnish  us  the 
subject-matter  for  definition  and  to  compare  one  type  with  another. 
This  is  an  especially  desirable  mode  of  procedure  in  the  present 
case,  because  the  term  "  monopoly  "  at  once  suggests  the  term  "  com- 
petition," with  which  it  is  inevitably  contrasted.  When  monopoly 
exists,  competition  is  thought  of  as  absent.  A  state  of  full  and 
free  competition,  on  the  other  hand,  is  incompatible  with  mo- 
nopoly. 

Competition  means  a  market  with  rival  sellers  and  buyers, 
and  prices  determined,  on  the  one  hand,  by  efforts  of  sellers, 
acting  independently  of  one  another,  to  dispose  of  commodities 
and  services,  and  on  the  other  hand,  by  efforts  of  purchasers, 
acting  independently  of  one  another,  to  secure  commodities  and 
services.  Competition  means  goods  and  services  freely  produced; 

187 


1 88  OUTLINES   OF  ECONOMICS 

in  other  words,  without  control  by  combination.  We  have  seen 
the  forces  that  under  competition  limit  producers  and  purchasers, 
and  thus  determine  value. 

Monopoly,  as  the  term  contrasted  with  competition,  means  com- 
bination and  unified  action,  signifying  restraint  on  the  free  offering 
of  commodities  and  services  by  rival  sellers  and  on  the  free  pur- 
chase of  these  commodities  and  services  by  rivals  who  desire  to 
secure  them.  The  word  "  monopoly  "  itself  means  a  condition  in 
which  there  is  a  single  seller  and  by  extension  a  single  purchaser, 
and  signifies  unity  in  management  of  some  kind  of  business  in 
some  essential  particular. 

The  particular  in  which  unity  is  secured  in  the  case  of  monopoly 
may  be  in  production,  it  may  be  in  sales,  it  may  be  in  purchases; 
or  it  may  be  in  any  two  or  all  three  of  these  particulars.  This 
use  of  the  term  "  monopoly  "  gives  us  a  clear  scientific  concept  which 
is  workable;  and  on  its  basis  we  may  then  formulate  this  definition 
of  monopoly:  Monopoly  means  that  substantial  unity  of  action 
on  the  part  of  one  or  more  persons  engaged  in  some  kind  of  business 
which  gives  exclusive  control,  more  particularly,  although  not  solely, 
with  respect  to  price. 

A  few  points  in  our  definition  require  comment.  Price  is 
essential,  and  must  be  regarded  as  the  fundamental  test  of  monop- 
oly, even  if  it  is  obvious  that  price  formation  and  price  control 
do  not  exhaust  monopoly,  since  its  import  reaches  beyond  price. 
The  other  things  than  price  control  which  monopoly  carries  with 
it  flow  from  such  control  and  are  not  secure  without  it.  A  cer- 
tain unity  of  action  may  be  obtained  without  the  establishment  of 
monopoly,  since  it  does  not  give  rise  to  monopoly  until  the  power 
to  control  price  is  secured. 

It  is  possible  that  monopoly  may  not  prevent  price  from  falling 
below  cost,  and  such  a  condition  of  price  is  quite  compatible  with 
the  definition  given.  The  advantage  of  unified  action  may  be 
that  loss  is  diminished.  Sometimes  a  monopoly  will  give,  perhaps, 
simply  normal  returns;  sometimes  there  is  loss,  as  in  the  case  of 
an  unprofitable  copyrighted  book;  sometimes  it  might  happen 
that  the  monopoly  price  would  be  exactly  the  same  as  the  com- 
petitive price;  sometimes  it  may  go,  and  generally  will  go,  above 


MONOPOLY  189 

the  competitive  price,1  although  there  might  be  other  gains  than 
those  resulting  from  higher  price. 

The  precise  definition  given  here  of  monopoly  appears  in  the 
main  to  be  in  accordance  with  the  best  English  usage,  and  also  to 
be  in  harmony  with  the  meaning  given  to  the  corresponding  word 
in  other  modern  languages  by  those  who  use  these  languages 
with  discrimination.  If  we  search  our  dictionaries  for  the 
meanings  of  monopoly,  it  will  be  seen  that  there  runs  through  them 
all  the  notion  of  exclusiveness  or  unity  as  the  dominating  thought, 
as  the  essential  thing  for  which  the  mind  is  more  or  less  success- 
fully struggling  and  the  thought  about  which  other  things  are 
grouped. 

When  we  search  our  law  books  and  judicial  utterances  on  the 
subject  of  monopoly,  unsatisfactory  as  they  have  been  to  all  in- 
terests involved  and  contradictory  to  one  another  in  their 
interpretations  in  various  particulars,  we  find,  nevertheless,  a 
sound  tendency  to  emphasize  unified  control  of  business  as  an 
essential  characteristic  of  monopoly.  Lord  Coke,  in  the  seven- 
teenth century,  laid  emphasis  upon  the  exclusive  nature  of  mo- 
nopoly, when  he  said  that  it  consisted  of  power  granted  "to  any 
person  or  persons,  bodies  politic  or  corporate,  for  the  sole  buying, 
selling,  making,  working,  or  using  of  anything,  whereby  any  per- 
son or  persons,  bodies  politic  or  corporate,  are  sought  to  be  re- 
strained of  any  freedom  or  liberty  that  they  had  before,  or  hindered 
in  their  lawful  trade."  7  Blackstone,  in  his  Commentaries  on  the 
Laws  of  England,  gave  almost  precisely  the  same  definition  in 
the  following  century.  Recent  American  decisions  lay  emphasis 
on  exclusiveness  as  a  test  of  monopoly. 

The  Idea  of  Monopoly  and  Industrial  Evolution.  —  But  the 
meanings  of  economic  categories  change  with  industrial  evolution. 
Even  such  terms  as  freedom  and  liberty  have  to  be  newly  inter- 
preted with  every  new  stage  and  even  with  every  marked  phase  in 
a  stage  of  economic  life.  Naturally  monopoly  has  acquired  a  new 
significance,  requiring  new  interpretation,  which  even  courts  are 

1  This  point  is  discussed  later  in  the  present  chapter,  vide  p.  206. 

2  Coke,  3  Institutes,  181.     Quoted  by  C.  F.  Beach,  Sr.,  in  his  Monopolies  and 
Industrial  Trusts,  §  5. 


1 90  OUTLINES   OF  ECONOMICS 

gradually  learning  to  give.  The  earlier  legal  definitions  made 
monopoly  proceed  from  an  express  grant  of  public  authority. 
Lord  Coke  says:  "  A  monopoly  is  an  institution  or  allowance  by 
the  king,  by  his  grant,  commission,  or  otherwise ;"  and  Black- 
stone  uses  similar  language  in  denning  monopoly  "  as  a  license  or 
privilege  allowed  by  the  king." 

Historically,  this  source  of  monopoly  power  is  of  paramount 
importance.  From  early  times,  English  sovereigns  granted  mo- 
nopolies either  for  public  or  private  reasons,  and  they  became  a 
grievous  burden.  Queen  Elizabeth,  in  particular,  sinned  in  this 
respect,  regarding  the  right  to  grant  monopolies  as  "  one  of  the 
fairest  flowers"  in  her  prerogative,  and  it  was  not  long  before 
the  citizen  found  himself  restrained  and  shut  in  on  every  side  by 
a  privileged  class  of  monopolists.1 

Our  forefathers  were  so  deeply  impressed  with  the  evils  which 
they  had  suffered  at  the  hands  of  the  monopolists  in  old  England 
that  in  the  Bills  of  Rights  and  elsewhere  in  the  early  constitutions 
of  our  commonwealths  they  frequently  inserted  severe  denun- 
ciations of  monopolies,  and  prohibited  them  unqualifiedly;  and 
these  declarations  and  prohibitions  still  last  in  several  states. 
Two  illustrations  will  suffice.  We  read  the  following  utterance  in 
Article  39  of  the  Declaration  of  Rights  which  forms  part  of  the 
constitution  of  Maryland :  "  Monopolies  are  odious,  contrary  to 
the  spirit  of  a  free  government  and  the  principles  of  commerce, 
and  ought  not  to  be  suffered."  And  the  people  of  Texas  still 
cherish  Section  26  of  Article  I  of  their  constitution,  which  among 
other  things  declares  that  "  monopolies  are  contrary  to  the  genius 
of  a  free  government,  and  shall  never  be  allowed." 

While  the  spirit  of  monopoly  is  as  old  as  man,  there  was  until 
this  century  comparatively  little  opportunity  for  monopoly  on 
any  large  scale  save  as  it  proceeded  from  express  grants  of  public 
authority.  These  grants  were  sometimes  made  for  public  purposes, 
and  sometimes  they  proceeded  from  mere  abuse  of  monarchical 
power,  and  were  given  to  favorites  of  royalty.  We  cannot  now 
stop  to  discuss  their  merits  and  demerits,  but  call  attention  to  the 

1  For  a  scholarly  treatment  of  Elizabethan  monopolies,  see  English  Patents 
of  Monopoly,  by  W.  H.  Price. 


MONOPOLY  !9I 

fact  that  they  became  odious,  and  were  prohibited  both  in  England 
and  in  this  country,  exception  being  made  of  patents,  copyrights, 
and  trade-marks.  At  the  present  time,  however,  monopolies  pro- 
ceed from  the  nature  of  industrial  society,  and  are  of  far  greater 
significance  in  our  economic  and  political  life  than  ever  before. 
The  really  serious  monopolies  of  our  day  are  far  more  subtle, 
and  have  for  the  most  part  grown  up  outside  of  the  law,  and  even 
in  spite  of  the  law. 

And  this  has  at  last  received  full  recognition  in  an  utterance  of 
the  Supreme  Court  of  the  United  States  in  which  the  idea  of  mo- 
nopoly, as  stated  in  our  definition,  is  reproduced; l  and  thus,  for- 
tunately, law  and  economics  are  brought  into  harmony,  as  they 
always  should  be. 

Complete  and  Partial  Monopolies.  —  We  have  taken  a  perfect 
type  of  monopoly  to  furnish  us  with  our  definition;  but  there  are 
imperfect  types,  or  incomplete  monopolies,  as  well  as  complete 
monopolies.  We  have  a  partial  monopoly  where  there  is  a  unified 
control  over  a  considerable  portion  of  the  industrial  field,  but  not 
over  a  sufficient  portion  to  give  complete  domination  of  the  whole 
field.  It  can  easily  be  understood  that  if  90  per  cent  of  a 
given  business,  but  no  smaller  percentage,  would  afford  control 
over  the  whole  business,  80  per  cent,  while  it  would  not  be 
sufficient  for  domination,  might  carry  with  it  an  advantage  to 
the  person  or  persons  enjoying  unified  control  over  the  80  per 
cent,  yielding  an  excess  above  competitive  returns  which  we 
may  properly  designate  as  one  sort  of  surplus  value.  Busi- 
nesses must  often  be  in  this  position,  and  a  monopoly  may 
be  obliged  to  go  through  several  stages  of  partial  monopoly  be- 
fore it  reaches  a  position  where  it  can  exercise  unified  control 
over  the  entire  business.  After  all,  it  is  a  question  of  degree  of 
control;  and  nearly,  if  not  quite  all,  economic  distinctions  are 
matters  of  degree. 

But  we  must  distinguish  sharply  between  a  condition  of  mo- 
nopoly and  other  conditions,  if  we  are  to  think  clearly  and  ac- 
curately. One  thing  which  does  not  yield  monopoly  is  mere  limi- 
tation of  supply,  and  it  is  strange  that  even  an  economist  of  the 
•McKenna,  J.,  in  National  Cotton  Oil  Co.  v.  Texas,  197  U.  S.  139. 


192  OUTLINES   OF   ECONOMICS 

ability  of  John  Stuart  Mill  should  have  found  the  essential  feature 
of  monopoly  in  this  limitation ;  for  this  at  once  makes  monopoly 
cover  the  entire  field  of  economic  activity,  inasmuch  as  economic 
activity  is  for  the  acquisition  of  valuable  things,  and  things  lack 
value  whenever  their  supply  is  adequate  for  the  satisfaction  of 
all  wants.  It  is  only  things  limited  in  proportion  to  human  desires 
that  have  value. 

Nor  may  we  say  that  a  valuable  thing  is  monopolized  because 
its  supply  is  limited  and  also  graded  in  quality.  Land  exists  in 
quantities  to  which  physical  nature  has  assigned  limits,  and  the 
supply  of  land  exists  in  grades  varying  in  fertility  and  desirability 
of  situation,  and  as  a  consequence  of  this  gradation  we  have  the 
rent  of  land.  Land  is  not,  however,  a  monopoly,  and  it  is  mis- 
leading to  speak  of  it  as  a  natural  monopoly.  Nowhere  do  we 
find  monopoly  either  in  the  ownership  or  in  the  cultivation  of 
land,  but  everywhere  competition  —  competition  among  unequals, 
to  be  sure,  but  still  competition. 

Land  rent  is  a  differential  gain,  a  gain  due  to  the  superiority  of 
the  land  owned  by  rent  receivers  over  that  cultivated  by  those 
who  are  making  use  of  land  which  affords  nothing  beyond  returns 
to  labor  and  to  capital.  Now  we  must  distinguish  between  the 
broad  concept  of  differential  gains  enjoyed  by  those  in  competi- 
tive pursuits,  and  the  monopolistic  gains  which  are  based  on  the 
absence  of  competition. 

Just  as  sharply  must  we  distinguish  between  competitive  busi- 
nesses of  large  magnitude  and  monopolies.  Department  stores 
in  no  city  in  the  world  enjoy  monopolies,  but  are  subjected  to  the 
steady,  permanent  pressure  of  competition.  There  are  those  who 
call  every  business  operating  on  a  vast  scale  monopoly,  and  would 
put  in  the  same  economic  category  a  gasworks  without  a  compet- 
itor and  a  huge  retail  dry-goods  establishment  with  rivals  at  every 
hand,  ready  to  seize  every  opportunity  for  an  advantage  over  it, 
and  certain  to  ruin  it  if  its  managers  relax  their  intense  activity 
and  watchfulness. 

Classification  and  Causes  of  Monopolies.  —  As  our  first  step  in 
the  treatment  is  the  formulation  of  the  idea  of  monopoly,  our 
second  must  be  the  classification  of  monopolies  with  an  examina- 


MONOPOLY 


193 


tion  of  their  causes.  Comparatively  little  can  be  said  about  mo- 
nopolies that  is  applicable  to  all  monopolistic  businesses.  Here, 
as  everywhere  else  in  economics,  we  need  analysis. 

Many  classifications  of  monopolies  have  been  given,  but  we  must 
here  confine  ourselves  to  the  three  which  seem  of  the  greatest 
importance  to  the  general  student. 

First  Classification 

A.  Public  Monopolies. 

B.  Private  Monopolies.1 

C.  Quasi-public  Monopolies. 

Public  Monopolies  are  those  businesses  which  are  owned  and 
operated  by  some  political  unit,  and  this  political  unit  is  the  direct 
and  immediate  beneficiary ;  in  other  words,  to  this  political  unit  in 
the  first  place  flow  all  the  benefits  of  monopoly.  A  Private  Mo- 
nopoly, on  the  other  hand,  is  a  monopoly  owned  and  operated  by  a 
private  person ;  it  may  be  a  natural  person,  —  that  is,  a  human 
being,  —  or  some  association  of  natural  persons,  as  a  partner- 
ship, or  it  may  be  a  private  corporation.  In  this  case  the  first  and 
immediate  beneficiary  of  the  benefits  of  the  property  and  business 
is  the  private  person,  although  large  benefits  may  flow  to  the 
general  public. 

It  is  believed  that  this  great  fundamental  distinction  between 
public  and  private  monopolies  is  essential  both  to  clear  thinking 
and  to  sound  public  policy.  Whoever  undertakes  to  tell  us  what 
is  true  about  monopolies,  and  what  is  wise  for  society  to  do  with 
respect  to  monopolies,  must  make  it  plain  whether  he  is  talking 
about  public  monopolies  or  whether  he  is  discussing  private  mo- 
nopolies. We  may  also  have  an  intermediate  class  designated  as 
Quasi-public  Monopolies.  An  illustration  is  afforded  by  state- 
owned  railways  operated  by  private  corporations;  although  prac- 
tically, in  the  United  States,  these  differ  in  their  management 
little  from  the  privately  owned  railways. 

1  In  our  classifications  the  coordinate  classes  will  be  indicated    by  the  same 
letters  or  marks.     The  capital  letters  will  indicate  the  chief  classes;  the  Roman 
numerals,  classes  subordinate  to  them;    and  the  Arabic,  classes  subordinate  to 
those  indicated  by  Roman  numerals,  and  so  on. 
O 


194  OUTLINES   OF  ECONOMICS 

Second  Classification.  —  The  second  classification  of  monopolies 
is  made  with  reference  to  the  source  of  monopoly  power,  and  is 
based  upon  a  different  principle  of  classification,  so  that  this  second 
classification  will  cut  across  the  first.  We  have  again  two  main 
classes,  and  these  are:  A.  Social  Monopolies;  B.  Natural  Mo- 
nopolies. These  are  further  classified  as  follows :  — 

A .  Social  Monopolies. 

I.    General  welfare  monopolies. 

1.  Patents. 

2.  Copyrights. 

3.  Trade-marks. 

4.  Public  consumption  monopolies. 

5.  Fiscal  monopolies. 

II.    Special  privilege  monopolies. 

1.  Those  based  on  public  favoritism. 

2.  Those  based  on  private  favoritism. 

B.  Natural  Monopolies. 

I.   Those  arising  from  limitation  of  supply  of  raw  ma- 
terial. 
II.   Those  arising  from  peculiar  properties  inherent  in 

the  business. 
III.   Those  arising  from  secrecy. 

Social  Monopolies.  —  Businesses  are  social  monopolies  when  they 
are  made  monopolies  not  by  their  own  inherent  properties,  but  either 
by  legislative  ~  enactment  or  by  forming  so  close  a  connection  with 
great  natural  monopolies  that  they  partake  of  the  nature  of  the  latter. 

As  already  stated,  in  old  times  kings  and  queens  frequently 
granted  exclusive  business  privileges  to  favored  persons,  and  per- 
mitted no  one  except  those  named  to  engage  in  such  undertakings. 
Such  monopolies,  however,  became  so  odious  that  sovereigns  were 
compelled  to  cease  granting  them.  Governments  still  create 
exclusive  privileges  by  patent  and  copyright  laws,  but  they  do  so 
in  behalf  of  the  general  public.  Authors  and  inventors  are  given 
exclusive  rights  over  their  productions  for  a  limited  period.  These 
monopolies  have  justified  themselves  through  the  stimulus  which 
they  have  given  to  invention  and  authorship. 


MONOPOLY  I95 

The  trade-mark  is  a  legal  monopoly  similar  to  the  patent  and  the 
copyright.  In  connection  with  lavish  advertising,  trade-marks 
in  recent  days  have  been  made  the  basis  of  enormous  profits.1 

Public  consumption  monopolies  and  fiscal  monopolies  call  for 
a  word  of  special  comment.  They  are  to  be  distinguished  the  one 
from  the  other  only  by  the  object  which  the  government  has  in 
view  in  establishing  them.  If  the  government  manages  for  itself 
or  grants  to  another  a  monopoly  of  the  liquor  traffic  with  the  object 
of  regulating  the  consumption,  the  monopoly  is  a  public  consump- 
tion monopoly.  If,  on  the  other  hand,  the  chief  object  is  not 
regulation,  but  income,  the  monopoly  is  a  fiscal  one.  Often  the 
two  objects  are  so  blended  that  it  is  difficult  or  impossible  to  say 
to  which  class  the  resulting  monopoly  belongs. 

Our  classification  names  two  kinds  of  special  privilege  monopo- 
lies. Those  monopolies  which  are  due  to  special  tariff  advantages 
or  to  other  legislation  are  rightly  said  to  be  based  on  public  favorit- 
ism. The  other  class  of  special  privilege  monopolies  consists  of 
those  which  grow  up  through  special  favors  granted  by  other 
monopolies,  especially  natural  monopolies,  such  as  railways. 

Natural  Monopolies.  —  Natural  monopolies  are  those  which 
depend  for  their  existence  on  natural  forces  as  distinguished  from 
social  arrangements.  They  grow  up  independently  of  man's  will 
and  desire,  and  sometimes  even  in  direct  opposition  to  it.  The 
words  which  we  have  used  in  our  classification  will  sufficiently 
explain  the  different  sources  from  which  they  arise.  By  far  the 
most  important  of  all  monopolies  are  natural  monopolies  of  the 
second  class,  chief  among  which  are  the  following:  wagon  roads 

1  The  full  treatment  of  trade-marks  involves  theoretical  points  which  would 
necessitate  a  discussion  too  lengthy  for  the  present  treatise.  They  are  used  largely 
in  competitive  businesses,  and  help  to  establish  what  is  termed  good-will.  They 
are  an  aid  to  the  shrewd  and  capable  in  the  general  effort  to  escape  what  may  be 
designated  as  the  "dead  level"  of  competition.  They  are  a  monopoly  not  in  the 
sense  of  giving  exclusive  control  of  one  sort  of  business,  but  in  the  strictly  legal 
sense  that  no  one  else  may  use  them.  A  clever  device,  coupled  with  excellence  and 
advertising,  may  have  very  high  value.  The  purchaser  of  oysters,  for  example, 
may  feel  that  when  he  buys  oysters  of  a  particular  "brand"  (trade-mark),  he  is 
getting  oysters,  plus  something  else ;  or,  in  other  words,  not  merely  oysters  such 
as  others  sell,  but  a  peculiar  excellence  which  can  nowhere  else  surely  be  had. 
It  is  merely  this  "plus  something  else"  that  is  a  monopoly.  Great  importance  is 
attached  thus  to  "establishing  a  brand." 


196  OUTLINES    OF   ECONOMICS 

and  streets,  canals,  docks,  bridges  and  ferries,  waterways,  harbors, 
lighthouses,  railways,  telegraphs,  telephones,  the  post  office, 
electric  lighting,  waterworks,  gas  works,  street  railways  of  all 
kinds.  Whenever  there  is  a  decided  increment  in  gain  resulting 
from  combination,  -we  have  a  tendency  to  monopoly  -which  will  over- 
come all  obstacles.  This  increment  of  gain,  which  is  the  cause  of 
monopoly,  is  always  present  in  businesses  that  occupy  peculiarly 
favorable  spots  or  lines  of  land,  and  that  furnish  services  or  com- 
modities which  must  be  used  in  connection  with  the  plant.  This 
may  be  said  to  be  the  law  of  natural  monopolies. 

Many  economists  believe  that  combination  and  production  on  the  largest 
possible  scale  give  a  decided  increment  in  gain,  and  thus  produce  monopolies 
to  be  designated  as  "capitalistic  monopolies."  The  question  really  turns 
upon  the  degree  of  growth  of  a  business  unit  which  adds  to  the  rate  of  gain ; 
and  the  position  is  taken  in  this  book  that  in  most  kinds  of  business  the  point 
of  maximum  efficiency  is  reached  long  before  the  point  of  monopoly  is  reached. 

One  or  two  very  cogent  reasons  may,  however,  be  stated.  An  exhaustive 
study  of  the  cases  cited  in  support  of  the  alleged  tendency  to  monopoly  in- 
herent in  large  capital  has  failed  to  reveal  a  single  one  in  which  the  monopoly 
did  not  enjoy  one  or  many  of  those  monopoly  advantages  which  we  have  al- 
ready mentioned  and  explained.  Moreover,  many  cases  in  which  the  pos- 
session of  large  capital  seemed  on  the  surface  to  be  a  dominating  influence, 
have  been  cases  in  which  the  monopoly  was  so  short-lived  as  to  furnish  little 
support  to  the  argument  of  those  who  cited  them.  After  all,  whatever  may  be 
the  advantage  conferred  by  large  capital,  we  must  remember  that  capital  is 
so  plentiful  that  one  gigantic  plant  can  always  find  a  rival  whenever  a  slight 
margin  of  profit  invites  its  establishment. 

Our  conclusion,  then,  maybe  stated  as  follows:  There  is  a  great 
and  growing  field  of  industry  in  which  competition  is  not  natural 
or  permanently  possible,  for  reasons  explained  in  the  text;  there 
is  another  field  within  which  monopoly  does  not  and  cannot  exist, 
and  within  which  social  monopoly  is  unlikely  to  arise. 

Third  Classification 
A.   Local  Monopolies 

These  are  monopolies  extending  over  a  relatively  small  area. 
The  gas  supply  of  any  city  is  an  illustration.  There  are  various 
monopolies  which  are  confined  to  a  single  locality.  Then  there 


MONOPOLY 


I97 


are  temporary  local  monopolies  which,  under  peculiar  exigencies, 
may  arise.  Two  young  men  in  Chicago  a  few  winters  ago 
cornered  the  market  on  eggs,  and  made  fifteen  thousand  dol- 
lars out  of  the  operation.  The  weather  was  so  cold  that  eggs 
could  not  be  shipped  to  the  city,  and  for  a  few  days  these 
speculators  had  a  monopoly. 


B.   National  Monopolies 
C.    International  or  Universal  Monopolies 

There  have  been  various  attempts  to  secure  universal  monopoly, 
of  which  the  copper  monopoly  of  1889  affords  an  illustration. 

These  are  more  or  less  arbitrary  divisions,  because  a  protective 
tariff  may  enable  a  monopoly  to  exist  in  one  country  when  the 
same  article  or  service  is  not  monopolized  in  another  country. 
There  are  attempts  to  establish  monopolies  beyond  the  nation, 
but  how  large  will  be  the  number  of  cases  in  which  success  will 
be  achieved,  remains  to  be  seen.  There  is  no  doubt  that  the  oil 
companies  of  the  United  States  and  Russia  are  endeavoring  to 
establish  an  international  and  even  a  world  monopoly. 

The  area  of  monopoly  is  a  topic  that  in  an  extended  treatise  would 
require  an  elaborate  treatment,  for  it  has  a  significance  which  has 
as  yet  not  been  anywhere  adequately  presented.  We  can  narrow 
down  the  area  of  monopoly  until  nearly  every  producer  of  goods 
or  seller  of  services  has  a  monopoly.  A  may  be  the  only  seller 
of  shoes  on  a  particular  street  of  his  city  or  in  a  particular  block 
or  building  on  his  street.  No  one  is  especially  disturbed  or  in- 
convenienced by  a  monopoly  of  so  limited  an  area.  In  general, 
it  may  be  said  that, — 

The  larger  the  area,  other  things  being  equal,  the  more  significant 
is  the  monopoly. 

Monopoly  Price.  —  Price  in  general  depends  upon  marginal 
utility,  and  that  depends  upon  the  intensity  of  desire  and  upon 
the  difficulty  or  ease  of  obtaining  goods  or  services  for  the  satis- 
faction of  desire.  If  payment  is  made  in  money  or  in  money  in- 
struments, price  depends  on  the  relative  abundance  of  the  supply 


198  OUTLINES   OF   ECONOMICS 

of  money  and  its  instruments.1  We  see  that  price,  then,  depends 
upon  limitation  of  supply  in  all  cases,  because  it  is  the  limitation 
of  supply  which  gives  us  the  utility  of  a  particular  concrete  good,  or 
our  marginal  utility.  As  the  supply  increases,  the  desires  satisfied 
are  of  a  lower  and  lower  order  until  the  point  of  satiety  is  reached, 
where  all  desires  are  satisfied  and  where  value  entirely  disappears. 

We  now  reach  the  chief  peculiarity  of  monopoly  price,  which  is 
found  in  the  power  of  the  monopolist  over  supply.  The  very  con- 
cept of  a  unified  control  over  business  means  power  to  control 
and  limit  supply.  Supply  is  limited  by  the  monopolist  at  that 
point  where  he  gets  the  greatest  returns,  and  if  he  receives  surplus 
returns,  they  are  due  to  the  fact  that  he  is  in  a  position  to  compel 
men  to  forego  satisfaction. 

Under  competition  in  the  case  of  freely  reproducible  goods, 
supply  is  limited  by  cost  of  production.  If  the  cost  of  production 
were  nothing,  there  would  be  no  limit  to  supply  until  all  wants 
were  satisfied.  Competition  in  its  very  nature  means  that  supply 
is  not  within  the  control  of  a  single  producer;  and  this  fact  gives 
us  the  protection  that  competition  affords  to  society;  and  it  is 
on  this  account  that  the  courts  regard  competition  as  one  of  the 
main  pillars  of  our  present  social  order. 

Now  as  the  supply  is  not  determined  as  under  competition  by 
the  cost  of  production,  it  is  determined  by  the  desire  of  the  mo- 
nopolist to  secure  the  maximum  of  revenue  possible  in  the  existing 
state  of  demand.  In  other  words,  the  monopolist,  freed  from  com- 
petition, and  governed  only  by  demand,  is  able  to  adjust  supply  to 
demand  in  such  a  way  that  the  price  will  stand  at  the  point  of 
highest  net  return.  In  determining  what  price  shall  be  fixed  and 
what  quantity  supplied,  —  in  other  words,  what  is  the  point  of 
highest  net  returns,  —  the  monopolist  consciously  or  unconsciously 
proceeds  according  to  the  following  principles :  — 

i.  He  realizes  that,  other  things  being  equal,  every  increase  of 
his  monopolized  product  will  result  in  lowering  its  price,  while 
every  decrease  in  the  supply  will  result  in  a  higher  price. 

1  And  abundance  of  money  will  depend  upon  marginal  cost  of  production  of 
the  precious  metals.  This  subject  is  treated  elsewhere,  as  also  the  general  subject 
of  price,  which  is  here  presented  only  in  abbreviated  form  for  present  purposes. 


MONOPOLY 


199 


2.  Of  the  expenses  of  production  there  are  some  that  in  a  well- 
organized  business  vary  roughly  in  proportion  to  variation  in  the 
supply.     It  will  frequently  happen  that  if  the  product  is  doubled, 
the  cost  of  raw  material  will  be  about  doubled.     Such  expenses 
may  be  called  variable  expenses. 

3.  Other  expenses,  within  the  limits  of  maximum  efficiency, 
remain  more  nearly  the  same,  no  matter  what  may  be  the  amount 
of   the   product.     These,  called   the  fixed  or  constant  expenses, 
include  the  cost  of  plant,  salary  of  superintendent,  interest  on 
bonds,  etc. 

It  follows  from  the  above  principles  that  the  monopolist,  in  a 
case  of  this  kind,  since  he  is  seeking  the  maximum  net  revenue 
from  his  business,  will  pay  little  attention  to  fixed  charges  in 
establishing  the  price  of  the  product,  but  will  consider  chiefly 
the  variable  expenses  in  connection  with  the  probable  demand 
for  his  goods  at  various  points.1 

An  Illustration.  —  We  may  illustrate  by  an  example  the  opera- 
tion of  these  principles.  The  following  table  shows  in  parallel 
columns  the  number  of  sales  of  a  monopolized  good  at  different 
prices;  the  total  resultant  earnings;  the  variable  expenses;  the 
fixed  expenses;  the  total  expenses;  and  finally,  the  net  revenue  or 
monopoly  profit :  — 


S 

M 

O 

H 
fa   S3 

t« 

M 

sl| 

SB 

2    W    fc 

<    15 

s  a 

<  »  1 

H     <     S 

„  s 
g  s 

^    u 

^  S 

^  s 

H     S 

z. 

H 

H 

8 

§w 

9 

OS     0*     ^ 

o  S  £ 

£  h 

5  " 

M 

P-t   w 

H  < 

<  x  g 

H  <  x 

fa    X 

H  x 

R 

P 

W 

>  w  £ 

>  W 

H 

M 

& 

S5 

!s 

$.10 

600,000 

$  60,000 

$.03 

$  18,000 

$50,000 

$  68,000 

-SS.cco 

.09 

800,000 

72,000 

•03 

24,000 

50,000 

74,000 

—    2,OOO 

.08 

1,200,000 

96,000 

•°3 

36,000 

50,000 

86,000 

+  10,000 

.07 

1,800,000 

126,000 

.O^ 

54,000 

50,000 

104,000 

+  22,000 

.06 

2,500,000 

150,000 

.O  "? 

75,000 

50,000 

125,000 

+  25,000 

•°5 

3,500,000 

175,000 

•°3 

105,000 

50,000 

155,000 

+  20,000 

.04 

5,500,000 

22O,OCO 

•03 

165,000 

50,000 

215,000 

+    5,000 

1  This  subject  would  require  further  treatment  in  a  larger  work,  but  the  limit 
of  space  and  proper  proportions  compel  us  here  to  confine  ourselves  to  the  broad 
general  statement. 


200  OUTLINES    OF   ECONOMICS 

Study  of  the  table  will  show  why,  in  the  case  assumed  here,  the 
monopoly  price  will  stand  at  six  cents.  Competition,  if  it  were 
present,  would  keep  on  increasing  the  supply  as  long  as  normal 
profit  could  be  obtained.  In  our  illustration  the  lowest  price  at 
which  production  could  be  carried  on  so  as  just  to  secure  a  profit 
above  the  expenses  of  production  would  be  four  cents;  and  four 
cents  would  therefore  be  the  competitive  price,  or  the  price  deter- 
mined by  the  balancing  of  marginal  utility  against  marginal  cost 
of  production.  But  since  the  monopolist  has  such  control  over 
the  production  that  he  can  control  the  supply,  he  will  cut  off  pro- 
duction at  2,500,000  units,  at  which  point  demand  will  fix  a  price 
of  six  cents,  and  will  give  the  largest  net  return,  viz.  $25,000. 

But  the  case  here  assumed  is  one  that  is  far  simpler  than  the  cases  frequently 
presented  by  real  life.  We  should  have  to  take  many  different  illustrations 
even  to  approximate  the  rich  complexity  of  economic  life.  We  have,  for 
example,  assumed  constant  fixed  charges,  and  such  an  assumption  is  one  that 
is  frequently  helpful,  because  it  often  corresponds  to  actuality.  But  "fixed 
charges,"  so  called,  are,  from  the  long-time  point  of  view,  variable.  The 
constant  charges  of  a  street-railway  system  imply  a  street-railway  system  at  a 
particular  time  and  place  and  a  street-railway  system  of  a  particular  kind, 
e.g.  one  with  single  track  and  switches.  If  a  street-railway  system  is  enlarged 
so  as  to  necessitate  "double-tracking"  and  a  new  power  plant,  we  will  have 
new  fixed  charges.  But  anything  like  an  exhaustive  discussion  of  these 
points  requires  so  much  space  as  to  be  suitable  only  for  special  treatises.1 

The  Effect  of  a  Tax.  —  Our  numerical  illustration  may  be  made  to  convey 
a  lesson  regarding  the  influence  of  taxation  upon  monopolies  and  monopoly 
price.  Fixed  expenses  have  no  influence  in  determining  the  price.  If, 
therefore,  a  fixed  tax,  say  of  $5000  a  year,  were  to  be  laid  upon  this  monopoly, 
it  would  not  result  in  an  increase  of  price.  A  study  of  the  table  will  show  that 
with  such  a  tax  the  net  revenue  at  price  .08  would  be  $5000;  at  price.  07, 
$17,000;  at  price  .06,  $20,000;  at  price  .05,  $15,000;  at  price  .04,  nothing. 
Thus  price  .06  will  still  be  the  point  of  maximum  net  revenue,  and  hence  the 
monopoly  price.  On  the  other  hand,  a  variable  tax,  for  instance,  a  tax  of  one 
cent  per  unit,  would  result  in  this  case  in  raising  the  monopoly  price.  In 
our  illustration,  such  a  tax  would  make  the  net  revenue  at  the  price  .08, 

—  $2000;  at  the  price  .07,  $4000;  at  the  price  .06,  nothing;  at  the  price  .05, 

—  $15,000.   Thus,  though  the  monopoly  would  find  its  profits  greatly  curtailed 
by  such  a  tax,  consumers  would  be  compelled  to  pay  one  cent  more  per  unit 
for  the  monopoly  product.     The  possible  advantage  which  society  might 

1  See  references  to  literature  at  the  close  of  the  chapter.  See  also  the  treatment 
of  Constant  and  Variable  Expenses  in  Chapter  XII  on  Value  and  Price. 


MONOPOLY  201 

draw  from  the  tax  would  therefore  be  wholly  or  in  part  offset  by  the  increased 
cost  of  the  commodity.  Such  a  raising  of  the  price  will  not  take  place,  however, 
if  the  demand  at  the  higher  price  is  not  sufficient  to  make  as  great  a  net 
revenue  as  at  the  lower  price.  We  may  conclude,  therefore,  that  fixed  taxes, 
or  taxes  on  the  net  revenue  of  a  monopoly,  cannot  be  shifted  wholly  or  in  part 
by  a  change  in  price ;  while  taxes  laid  in  proportion  to  the  amount  of  business, 
since  they  contribute  an  addition  to  the  variable  expenses,  may  be  wholly  or  in 
part  shifted  by  a  change  in  price. 

A  Law  of  Monopoly  Price.  —  It  is  sometimes  said  that  the  price 
of  a  monopolized  good  depends  solely  upon  the  will  of  the  monop- 
olist. In  the  strict  sense  of  the  phrase  this  is  not  true.  As  our 
explanation  has  shown,  the  monopolist  is  forced  by  economic  mo- 
tives to  establish  such  a  price  as  will  give  the  maximum  net  reve- 
nue. There  are  certain  conditions  on  the  side  of  demand  which 
therefore  have  a  decisive  influence  in  determining  monopoly  price. 
We  may  group  the  most  important  of  these  in  a  general  statement 
which  may  properly  be  called  the  law  of  monopoly  price:  The  greater 
the  intensity  of  customary  use  of  the  monopolized  commodity  or 
service,  the  higher  the  general  average  of  economic  well-being,  and 
the  more  readily  wealth  is  generally  expended,  the  higher  will  be 
the  monopoly  price  which  will  yield  the  largest  net  returns. 

The  phrase,  intensity  of  customary  use,  may  require  explanation. 
It  signifies  simply  the  strength  of  custom  with  respect  to  the  use 
of  a  monopolized  article.  If  the  people  of  France,  for  example, 
are  accustomed  to  use  large  quantities  of  tobacco,  —  there  a  gov- 
ernment monopoly,  —  and  if  they  cling  with  a  high  degree  of  in- 
tensity to  this  custom,  it  will  obviously  be  possible  profitably  to 
raise  the  price  a  great  deal  above  competitive  price;  whereas,  if 
the  custom  is  one  that  is  relatively  weak,  —  that  is,  weak  as  com- 
pared with  the  force  to  which  they  cling  to  their  customary  con- 
sumption of  other  articles,  —  a  very  high  price  will  so  diminish 
consumption  as  to  lessen  net  profits. 

Thus  monopoly,  without  any  effort  of  its  own,  shares  in  the  in- 
creasing wealth  of  a  country,  and  absorbs  a  considerable  part  of 
it.  It  is,  for  example,  among  other  influences,  the  larger  wealth 
and  the  greater  willingness  to  spend  freely  that  makes  monopoly 
more  profitable  in  the  United  States  than  in  Germany  or  other 
European  countries.  The  search  for  other  illustrations  of  the 


202  OUTLINES   OF   ECONOMICS 

law  should   prove    an   interesting  and  valuable  exercise  for  the 
student. 

Class  Price.  — Thus  far  we  have  assumed  that  the  monopolist 
charges  one  uniform  price  and  sets  the  price  at  the  point  which 
yields  him  the  largest  net  returns.  But  it  is  obvious  that  his  gains 
will  be  increased  if  he  is  able  to  vary  his  price.  His  gains  would 
be  highest  if  he  could  charge  each  individual  that  price  which  would 
yield  the  largest  net  returns,  taking  into  account  the  number  of 
sales  and  profits  on  each.  A  rich  man  and  a  free  spender  might 
pay  double  the  current  rates  for  gas  or  electric  light  without 
diminishing  his  consumption  in  the  least.  But  in  the  case  of  any 
large  modern  business  it  is  obviously  impracticable  to  fix  a  price 
for  each  individual,  even  were  there  no  legal  difficulties  in  the  way, 
as  there  are  in  the  case  of  the  great  monopolistic  businesses  such 
as  gas  and  electric  lighting,  railway  transportation,  etc.  The 
next  best  thing  for  the  monopolist  is  to  divide  his  public  into  classes, 
and  to  charge  to  each  class  that  price  which  will  yield  the  largest 
net  returns.  In  the  table  already  given,  we  found  that  six  cents  was 
the  monopoly  price  on  the  hypothesis  of  one  uniform  price,  but 
obviously,  if  the  eight-cent  and  seven-cent  prices  could  be  secured, 
and  six  cents  reserved  as  a  price  for  sales  that  could  not  be  made 
at  eight  or  seven  cents,  the  profits  would  be  still  higher.  This 
gives  rise  to  what,  in  its  broad,  general  terms,  we  call  class  price. 
The  monopolist  seeks  in  every  possible  way  to  divide  his  community 
into  classes  and  to  secure  from  each  the  highest  possible  price. 
We  observe  a  remarkable  development  of  class  price  in  the  case 
of  our  railways;  and,  unless  legal  obstacles  are  interposed,  this 
development  will  doubtless  go  still  farther.  We  have  special 
trains  with  an  extra  charge.  We  have  privately  owned  railway 
coaches;  our  drawing-rooms  and  single  seats  in  "parlor  cars"; 
our  ordinary  first-class  tickets  ;  and  our  second-class  tickets,  the 
purchasers  of  which  frequently  ride  in  the  "  day  coach  "  with 
the  first-class  passengers.  Then  we  have  single  tickets,  fifty-trip 
family  tickets,  monthly  commutation  tickets,  etc.,  with  enormous 
variations  in  price.  We  may  go  farther  and  say  that  the  whole 
American  railway  rate  system  of  "  charging  what  the  traffic  will 
bear  "  is  a  consummate  example  of  monopoly  prices. 


MONOPOLY 


203 


Nor  need  it  be  supposed  that  in  all  its  ramifications  class  price 
is  a  bad  thing.  It  is,  when  ignorance  and  need  are  exploited  by 
a  special  high  price  ;  frequently  it  works  well  when  an  attempt 
is  made  to  reach  a  class  of  limited  means  with  a  very  low  price, 
as  in  the  case  of  early  and  late  workingmen's  trains,  etc. 

Monopoly  price  will  vary  with  use  also  ;  and  this  is  one  special 
subhead  under  class  price,  and  may  be  designated  as  use  price. 
The  typical  instance  is  that  of  two  prices  frequently  charged  for 
gas  :  a  higher  when  it  is  used  for  illuminating  purposes ;  a  lower 
when  it  is  used  for  fuel. 

Monopoly  price  necessarily  varies  from  country  to  country, 
from  place  to  place,  and  from  time  to  time.  This  follows  neces- 
sarily from  our  law  of  monopoly  price,  and  is  a  matter  of  familiar 
observation.  The  monopoly  price  yielding  the  highest  net  returns 
is  lower  among  the  careful,  prudent  Germans  with  relatively  small 
incomes  than  it  is  among  the  free-spending  Americans  with  rela- 
tively large  incomes  often  easily  earned. 

A  difficulty  suggests  itself  at  this  point,  and  this  is  found  in  the 
departure  from  uniformity  of  price  of  non-monopolized  articles  and 
services.  We  have  to  consider  the  question:  Are  the  apparent 
class  prices  in  competitive  businesses  class  prices  in  the  true  sense 
of  the  term  ?  If  so,  wherein  does  the  competitive  class  price  differ 
from  the  monopolistic  class  price?  To  answer  this  question  we 
must  first  of  all  consider  the  distinction  between  what  we  may 
term  "  commodity  competition  "  and  "  business  unit  competition." 

When  we  speak  about  commodity  competition,  we  have  refer- 
ence to  that  competition  with  respect  to  a  commodity  which  gives 
uniform  price,  if  competition  works  perfectly.  We  think  of  the 
great  staples  like  wheat  and  wool,  —  those  staples  which  have  a 
world  market.  But  the  competition  between  retail  business  men 
is  a  competition  of  a  different  sort.  It  is  the  competition  of  one 
business  unit  as  such  with  another  business  unit  as  such.  It  is 
a  kind  of  competition  that  exists  between  the  grocers  in  the  same 
city,  or  mammoth  department  stores  in  New  York  and  Chicago. 
It  is  competition  which  is  frequently  very  sharp  ;  but  even  when  it 
is  the  sharpest,  it  does  not  mean  in  retail  trade  real  commodity 
competition.  It  does  not  mean  that  the  prices  of  all  goods  sold 


204  OUTLINES   OF  ECONOMICS 

are  the  same,  but  it  means  this:  where  we  have  sharp  competition 
the  gains  are  in  proportion  to  expenditure  of  economic  energy, 
using  that  term  "  economic  energy  "  as  a  composite  term  imply- 
ing a  certain  output  of  economic  force,  whether  this  takes  the  form 
of  labor  or  capital  or  business  management. 

Each  one  of  the  business  units  will  make  a  specialty  of  some 
one  line  of  commodities  upon  certain  days.  Special  prices  will 
be  offered  ;  but  that  means  something  very  different  from  the  class 
price  which  we  have  considered  in  our  discussion  of  monopoly. 
Every  one  will  agree  that  that  is  the  case.  The  consumer  considers 
very  generally  the  prices  charged  as  a  whole.  He  knows  very  well 
when  he  goes  to  one  retail  establishment  that  for  a  certain  par- 
ticular article  he  may  be  paying  a  little  bit  more  than  he  would 
pay  in  some  other  store ;  but  the  retail  purchaser  as  a  general  rule 
does  not  consider  each  individual  price,  but  he  considers  all  the 
prices  that  he  pays.  It  is  intolerable  for  the  consumer  to  go 
about  a  town  searching  for  the  lowest  price  of  every  little  com- 
modity, —  to  buy  a  paper  of  pins  at  one  place  because  it  is  a  little 
cheaper  than  at  any  other  place,  to  buy  a  pound  of  butter  at  one 
place,  a  pound  of  sugar  at  another.  People  do  not  ordinarily 
do  that. 

Now  each  retailer  looks  upon  his  business  as  a  unit.  He  tries 
to  derive  from  the  business  as  a  whole  the  greatest  profit.  Each 
one  is  putting  his  capacity  into  the  business.  One  says,  "  I  can 
do  better  if  I  sell  this  article  at  cost,  or  if  I  sell  that  article  some- 
what below  cost."  It  was  not  very  long  ago  that' a  large  depart- 
ment store  in  New  York  City  sold  the  popular  magazines  at  less 
than  was  paid  for  them.  That  was  not  a  class  price  in  any  sense 
of  the  term.  That  was  a  certain  expenditure  for  advertising 
purposes. 

To  some  extent  people  do  go  about  and  try  to  get  all  the  special 
prices  in  each  particular  establishment,  but  that  is  not  done  usu- 
ally, so  far  as  purchases  as  a  whole  are  concerned.  On  the  other 
hand,  there  is  a  limitation  very  often  in  the  arrangement  that  a 
store  will  sell  only  so  much  —  one  pair  of  gloves  or  so  many  yards 
of  silk  at  a  special  price  —  to  one  customer.  But  we  are  dealing 
here  with  a  different  sort  of  phenomenon  from  class  price. 


MONOPOLY  205 

In  wholesale  business  there  is  an  attempt  to  unite  the  business 
unit  competition  and  the  commodity  competition.  Here  the  pur- 
chases are  very  much  larger,  and  a  person  does  not  hesitate,  to 
a  certain  extent,  to  go  from  one  wholesaler  to  another  wholesaler 
to  make  a  particular  purchase  of  some  articles.  Many  persons 
would  be  a  little  bit  ashamed  to  divide  their  groceries  among  a 
half-dozen  grocers  so  as  to  get  at  each  place  the  articles  selling  at 
a  special  price.  When  we  have  a  unity  of  these  two  sorts  of  com- 
petition, then  we  have  what  we  may  call  perfect  competition,  — 
where  we  have  a  competition  between  the  business  units  which 
includes  a  commodity  competition,  so  that  all  articles  are  selling 
at  the  same  price  and  each  dealer  has  net  returns  in  proportion 
to  what  he  puts  in  of  economic  energy. 

It  is  in  the  nature  of  competition  to  cater  to  various  economic 
classes  in  the  community,  and  this  is  an  entirely  different  phenome- 
non from  that  in  the  case  of  the  gas  company  charging  two  different 
prices  for  an  article  according  to  the  use  to  which  it  is  put.  Every 
retailer  considers  the  class  to  which  he  will  cater.  Retailers  tell 
us  that  such  is  the  case.  One  will  say,  "  We  try  to  cater  to  the 
fashionable,  wealthy  people,  the  high-toned  people."  Another 
will  say:  "  I  do  not  try  to  reach  the  so-called  '  best  people  '; 
I  try  to  cater  to  the  middle  class.  My  training  fits  me  better  to 
cater  to  this  middle  class  than  to  cater  to  the  fashionable  people. 
If  I  find  that  I  can  do  this  too,  —  very  well;  but  I  especially  cater 
to  the  middle  class."  1  We  find  that  at  stores  like  Marshall  Field's 
they  recognize  the  various  classes  of  the  community  and  try  to 
reach  the  various  classes  of  the  community  by  their  basement 
department,  and  by  their  first  floor,  and  the  upper  floors.  But 
that  does  not  mean  the  absence  of  competition  in  the  business  as 
a  whole;  but,  taking  the  business  as  a  whole,  it  competes  with  other 
retail  establishments  in  Chicago.  Here  we  have  a  different  class 

1  It  must  not  be  overlooked  that  there  is  a  variation  in  cost  of  doing  a  retail 
business  dependent  upon  the  class  of  people  to  which  a  particular  retailer  caters. 
Over  against  the  higher  prices  charged,  let  us  say  by  a  fashionable  grocer,  we  have 
to  put  the  higher  quality  of  service.  People  of  wealth  and  fashion  require  prompt 
service,  involving  expense.  Also,  frequently  the  shops  that  cater  to  fashionable 
people  give  very  long  credit  and  lose  heavily  in  many  cases.  These  are  consider- 
ations of  a  different  kind  from  those  mentioned  in  the  text. 


206  OUTLINES    OF   ECONOMICS 

price  from  that  we  have  considered.  We  have  a  competitive  class 
price  which,  if  the  competition  is  perfect,  yields  no  surplus.  This 
does  not  mean  that  some  will  not  gain  more  than  others  in  com- 
petitive business.  The  gain  is  in  proportion  to  the  output  of 
energy. 

Monopoly  Price  High  Price.  —  It  is  often  said,  and  frequently 
even  in  judicial  decisions,  that  the  monopolist  can  charge  any  price 
that  he  pleases.  We  have  already  seen  that  this  is  not  the  case. 
The  law  of  monopoly  price  shows  that  the  price,  even  in  the  case 
of  monopoly,  is  determined  by  economic  forces.  It  is  conceivable 
that  there  may  be  cases  in  which  monopoly  price  will  exactly  coin- 
cide with  competitive  price,  although  the  probabilities  would  be 
against  a  frequent  coincidence  of  this  kind.  There  are  also  cases 
where  monopoly  price  may  be  even  lower  than  competitive  price. 
If  a  monopolist  should  be  able  to  effect  great  savings  as  compared 
with  the  expense  of  doing  business  under  competition,  it  could 
theoretically  happen  that  the  price  which  would  yield  the  largest 
net  returns  would  be  a  lower  price  than  would  be  possible  under 
competition.  Probably,  and  in  fact  almost  certainly,  under  a 
condition  of  competition,  letters  could  not  be  carried  as  cheaply 
as  they  are. 

Generally  there  are  strong  reasons  for  the  position  that  mo- 
nopoly price  is  high  price.  Monopoly  is  formed  for  the  sake  of 
gain.  Gain  may  be  secured  in  two  ways  by  monopoly :  first, 
through  economies  of  production;  and  it  is  alleged  by  trust  pro- 
moters that  these  economies  are  a  chief  motive  in  their  activity. 
There  are  some  gains  of  this  kind,  but  it  is  too  early  to  say  precisely 
what  they  are.  When  we  compare  a  monopolistic  business  with 
a  competitive  business  organized  on  such  a  scale  as  to  secure  the 
maximum  of  efficiency,  the  gains  of  competition  in  alertness  and 
inventiveness,  stimulated  by  rivalry,  have  recently  been  too  little 
considered. 

The  second  source  of  gain  in  monopoly  is  found  in  the  ability  to 
charge  high  price.  In  confirmation  of  the  position  that  monopoly 
price  is  high  price,  we  may  refer  to  history,  the  utterances  of  which 
seem  to  be  clear  and  distinct.  At  any  rate,  there  can  be  no  doubt 
that,  in  the  opinion  of  historians  who  have  treated  the  subject, 


MONOPOLY 


207 


monopoly  means  high  price.  Hume,  in  his  treatment  of  monop- 
oly in  his  History  of  England,  speaks  of  the  price  of  monopolized 
articles  as  exorbitant,  and  cites  the  price  of  salt,  the  price  of  which 
had  been  raised  by  monopoly  tenfold  and  even  more.  The  pro- 
duction or  sale  of  salt,  or  both,  is  frequently  a  government  mo- 
nopoly, and  it  is  generally  conceded  that  in  all  cases  of  monopoly 
the  price  has  been  so  extremely  high  as  to  be  a  real  popular  griev- 
ance; and  it  is  generally  necessary  to  inflict  severe  penalties  to 
prevent  the  people  from  securing  the  salt  at  a  lower  price  from 
non-authorized  sources.  But  of  still  greater  significance  are  the 
results  of  the  investigations  of  the  Industrial  Commission  of  the 
United  States,  as  seen  in  the  Preliminary  Report  of  1900  (Vol.  I 
of  the  complete  report).  It  is  there  made  evident  that  when 
monopoly  appears  in  a  form  at  all  clear  and  well-defined,  the 
tendency  is  plain  to  increase  the  margin  between  the  prices  of 
finished  products  and  raw  materials.1 

The  courts  of  the  world  have  made  it  clear  in  their  judicial  ut- 
terances that  they  regard  monopoly  price  as  high  price;  and,  as 
their  opinions  are  based  upon  cases  actually  brought  before  them, 
we  cannot  do  otherwise  than  attach  great  importance  to  their 
view. 

Wherever  commissions  have  been  formed  with  power  to  regulate 
monopoly  price,  and  these  commissions  have  been  comprised  of 
independent  and  strong  men,  there  has  been  a  marked  tendency 
to  reduce  monopoly  price;  because  unregulated  monopoly  price 
has  been  found  to  be  excessive  and  unjust.  The  judicially  minded 
Railroad  Rate  Commission  of  Wisconsin  affords  an  illustration. 
This  Commission  has  authorized  a  higher  price  in  a  few  cases,  but 
generally  has  been  forced  to  lower  prices,  although  in  the  notable 
case  of  passenger  rates  it  did  not  go  so  far  as  the  legislature.  The 
investigations  of  the  Railroad  Rate  Commission  led  the  members 
to  believe  that  a  reduction  from  three  cents  to  two  and  one  half 
cents  per  mile  for  all  the  leading  railways  in  Wisconsin  was  just; 
whereas,  subsequently,  the  legislature  lowered  the  rate  to  two  cents 

1  See  Report  in  Vol.  I  (Industrial ^ Commission),  by  Professor  J.  W.  Jenks.on 
"  Industrial  Combinations  and  Prices,"  pp.  39-57 ;  and  also  Chap.  VIII,  "  Prices," 
in  the  same  author's  work,  The  Trust  Problem. 


208  OUTLINES   OF  ECONOMICS 

per  mile.  But  even  the  decision  of  the  Commission  (which  was 
accepted  by  the  railways)  was  a  reduction  of  over  16  per  cent. 
Investigations  held  have  resulted  very  generally  in  a  lower  price 
for  gas.  All  important  investigations  of  street-car  service  in  the 
great  cities  of  the  United  States  have  terminated  in  the  conclusion 
that  the  monopoly  price  of  five  cents  per  passenger  is  a  high  price. 
The  recent  settlements  with  the  street-car  companies  of  Chicago 
have  been  based  upon  an  agreement  to  maintain  a  five-cent  fare 
and  to  give  to  the  city  of  Chicago  55  per  cent  of  the  net  gains. 
According  to  the  statements  of  the  interested  parties,  even  this  will 
leave  a  very  handsome  return  for  the  owners  of  the  street-car 
properties. 

In  the  next  place,  we  refer  to  the  experience  and  observation  of 
men  when  they  have  had  dealings  with  well-defined  monopolies. 
The  express  companies  and  the  oil  business  afford  illustrations 
falling  within  the  experience  and  observation  of  nearly  all  readers 
and  students  of  this  work. 

Monopolies  and  the  Distribution  of  Wealth.  —  We  have  not  the 
precise  statistical  data  which  will  enable  us  to  state  the  exact 
influence  of  monopoly  upon  the  distribution  of  wealth.  We  have, 
however,  sufficient  data  to  warrant  the  opinion  that  the  high 
price  of  monopoly  and  the  gains  resulting  from  the  exclusive  posi- 
tion of  the  monopolist  give  us  a  large  privileged  class  in  countries 
of  modern  civilization,  but  especially  in  the  United  States.  An 
advantage  of  the  monopolist  in  the  United  States  is  found  in  the 
law  of  monopoly  price,  coupled  with  the  failure  to  regulate  monop- 
oly as  carefully  in  our  country  as  it  has  been  regulated  in  Europe, 
generally  speaking.  Ours  is  a  country  in  which  there  is  large 
wealth,  in  which  wealth  is  easily  acquired,  and  in  which  conse- 
quently people  spend  freely.  Monopoly  price  must,  then,  be  excep- 
tionally high  price  and  yield  exceptional  gains.  Even  when  the 
increment  of  price  is  comparatively  small,  it  has  large  significance 
in  the  case  of  the  sale  of  a  vast  number  of  units  of  services  or  com- 
modities. The  difference  between  a  four-cent  street-car  fare  and 
a  five-cent  street-car  fare  may  not  appear  to  be  great,  but  it  is  a 
difference  of  25  per  cent  and  is  enormous. 

All  the  many  investigations  that  have  been  held  recently  in 


MONOPOLY 


209 


various  lines  of  business  (especially  in  railways,  beef  industry, 
coal  mining,  etc.).  point  to  monopoly  as  a  prime  cause  of  the  so- 
called  swollen  fortunes  of  this  country.  In  this  and  other  countries 
some  histories  of  families  distinguished  for  wealth  have  been  written, 
and  probably  few  if  any  cases  could  be  found  in  which  some  mo- 
nopoly element  had  not  entered.  Various  lists  of  rich  men  have 
been  published,  among  them  one  published  by  the  New  York  Sun 
in  1855,  and  one  published  by  the  New  York  Tribune  in  1892. 
These  lists  cannot  by  any  means  be  presumed  to  be  accurate,  and 
yet  they  do  afford  very  considerable  evidence  of  the  sources  of 
large  fortunes,  and  point  to  monopoly  as  a  prime  cause  of  the  mod- 
ern enormous  fortunes.  This  is  a  subject  which  in  itself  would 
require  a  larger  book  than  the  present  one  for  adequate  treatment. 
The  student  must  attempt  by  observation  and  study  to  carry  for- 
ward the  lines  of  investigation  and  thought  here  suggested,  being 
constantly  on  his  guard  against  undue  haste  in  generalization. 

Public  Policy  with  Respect  to  Monopolies.  —  It  is  possible  to 
throw  out  only  a  few  suggestions  in  this  place.  As  many  monopo- 
lies have  come  as  a  result  of  underlying  laws  of  industrial  evolu- 
tion, they  cannot  all  be  abolished.  Experience  and  the  nature  of 
industries  like  railways,  gas  works,  etc.,  falling  under  the  head  of 
"  public  utilities,"  so  called,  should  be  conclusive.  We  must  have 
monopoly  in  these  cases,  and  the  only  question  we  are  concerned 
with  is,  "  What  kind  of  monopolies  shall  we  have  ?  "  Again,  we 
cannot  abolish  monopoly  simply  as  a  result  of  legislative  enact- 
ment. The  anti-trust  laws  of  our  states,  so  generally  failures, 
should  be  conclusive  as  to  this  point.  On  the  other  hand,  legis- 
lation is  not  powerless,  but  it  must  be  in  accord  with  the  laws  of 
industrial  evolution.  The  problem  is  abolition  of  undesirable 
monopoly  where  this  is  feasible;  and  very  generally  regulation 
rather  than  destruction.  Here,  again,  we  have  the  experience 
of  the  United  States  and  of  other  modern  nations  as  confirmation. 

We  may,  to  begin  with,  admit  that  unregulated  monopolies  in 
private  hands  have  always  been  odious  and  are  opposed  to  the 
principle  of  the  laws  of  civilized  nations.  They  are  opposed  to 
that  endeavor  to  secure  equality  of  opportunity  which  is  funda- 
mental in  modern  democracy  and  which  manifests  itself  as  a  red 


210  OUTLINES   OF  ECONOMICS 

thread  running  through  American  history.  Even  George  Wash- 
ington, generally  looked  upon  as  so  calm  and  self-contained, 
denounced  monopolizers  and  wished  they  might  be  "  hunted  down 
as  pests  of  society  "  and  "  hanged  on  a  gallows  five  times  higher 
than  the  one  prepared  for  Haman."  *  It  is  not  so  much  high  price 
that  disturbs  the  modern  man  as  it  is  inequality  of  opportunity; 
and  this  general  sentiment  has  been  very  clearly  and  forcibly 
expressed  in  court  decisions.  It  makes  little  impression  upon  the 
American  public  when  it  is  attempted  to  show  that  the  Standard 
Oil  Company  has  lowered  price.  The  enormous  fortunes  to  which 
it  has  given  rise  suggest  that  price  has  been  higher  than  it  should 
be,  yielding  far  greater  than  competitive  gains;  but  even  if  it  could 
be  proved  that  the  price  had  been  voluntarily  lowered,  it  would 
not  be  convincing,  because  we  are  disturbed  by  the  alleged  engross- 
ment of  opportunities  by  a  few  members  of  the  community  and 
not  open  to  others.  Nor  would  it  satisfy  the  American  public  to 
be  convinced  of  the  sincerity  of  the  professed  benevolence  and  of 
the  personal  integrity  of  the  leaders  of  this  gigantic  undertaking. 
The  question  is  one  of  the  action  of  economic  forces,  largely  im- 
personal; the  leaders  are  often  really  coerced  by  these  forces; 
and  from  one  point  of  view  are  to  be  looked  upon  as  their 
victims. 

Obviously,  the  first  step  in  a  treatment  of  monopolies  is  to  dis- 
criminate between  monopolies  owned  and  operated  by  organized 
society  (that  is,  nation,  state,  or  city,  and  managed  in  the  general 
interest)  and  private  monopoly.  If  it  is  true  that  a  certain  portion 
of  the  industrial  field  is  naturally  monopolistic,  special  privilege 
can  be  removed  by  government  ownership.  This  is  the  first  and 
most  obvious  method.  The  difficulties  of  government  ownership 
are  such,  however,  that  another  method  is  by  many  advocated 
as  preferable  and  is,  as  a  matter  of  fact,  being  thoroughly  tried 
in  the  case  of  railways  in  the  United  States.  And  that  is  the  method 
of  public  control  of  monopolies  privately  owned  and  operated. 
The  public  control,  to  secure  equality  of  opportunity,  must  so 
regulate  monopolies  and  limit  price  that  the  gains  will  be  no  higher 
than  those  produced  by  equally  wise  investments  and  equally  wise 
1  Bullock,  Essays  on  the  Monetary  History  of  the  United  States,  p.  67. 


MONOPOLY  211 

and  prudent  management  in  the  field  of  competition.1  Some- 
times it  is  stated  that  owners  of  railways  and  other  monopolistic 
enterprises  should  have  a  competitive  return  upon  all  the  money 
that  they  have  invested.  This  would  give  them  a  position  of  spe- 
cial privilege,  inasmuch  as  in  the  competitive  field  a  great  deal  of 
money  is  lost.  It  is  only  wise  investment  and  careful  management 
in  the  field  of  competition  that  can  secure  returns  equal  or  supe- 
rior to  the  current  rates  of  interest.  Imprudently  invested  capi- 
tal is  lost  in  the  field  of  competition;  and  when  it  is  imprudently 
and  unwisely  invested  in  the  field  of  monopoly,  it  cannot  justly 
claim  any  return. 

Finally,  democratic  sentiment  demands  that  there  should  be  no 
needless  extension  of  the  field  of  monopoly  through  favoritism, 
as  seen  in  rebates  and  special  rates  of  railway  transportation  com- 
panies. 

The  Relation  of  Monopoly  to  Trusts.  —  The  development  of 
industry  is  treated  elsewhere  in  this  work,  and  it  is  shown  that,  as 
a  result  of  the  forces  inherent  in  industrial  society,  we  pass  over 
from  labor  aided  with  few  and  simple  implements,  scarcely  more 
than  an  extension  of  hands  and  feet,  so  to  speak,  to  labor  aided 
by  increasingly  complicated  and  costly  tools,  and  then  we  find 
labor  supplemented  and  even  replaced  by  machines,  ushering 
in  the  era  of  capitalism;  and,  as  this  transition  is  made,  industry 
is  conducted  on  an  ever  larger  and  larger  scale.  The  business  unit 
grows  from  the  small,  isolated  shop  to  such  a  mammoth  concern  as 
the  United  States  Steel  Corporation,  owning  an  appreciable  propor- 

1  This  does  not  mean  that  in  the  case  of  old  enterprises  price  must  always  be  so 
reduced  that  the  gains  shall  yield  a  competitive  return  only  on  the  physical  value 
of  a  plant.  The  principle  of  vested  rights  or  interests  has  to  be  given  a  certain 
r&le.  These  have  often  been  created  by  society  rather  than  by  private  persons,  and 
faith  must  be  kept.  In  the  case  of  railways  and  the  telegraph,  the  American  nation 
and  states  have  deliberately  encouraged  a  wasteful  policy  of  competition  which 
is  in  large  measure  responsible  for  high  capitalization.  It  would  not  be  right 
to  place  upon  holders  of  these  properties  all  the  burdens  of  a  mistaken  public 
policy  in  the  past.  What  is  needed  is  to  declare  a  public  policy  for  the  future 
and  to  base  returns  for  the  future  upon  future  actual  investments  in  the  case  of 
public  utilities.  In  any  case,  we  should  have  a  physical  valuation  of  railways, 
gas  works,  etc.,  as  a  help  in  determining  fair  prices  for  present  and  future.  Now 
and  here  we  can  do  no  more  than  to  throw  out  these  suggestions  in  regard  to  a 
pressing  present  problem  of  great  magnitude. 


212  OUTLINES   OF  ECONOMICS 

tion  of  the  wealth  of  a  vast  nation.  These  large  business  units,  as  a 
result  of  evolution,  are  commonly  designated  as  trusts;  but  they 
present  simply  the  problems  of  large-scale  industry  unless  they  com- 
prise elements  of  monopoly.  This  indeed  very  often,  perhaps  usually, 
happens  in  the  case  of  the  largest  industrial  establishments.  They 
have  been  aided  by  rebates  and  other  favors  from  railways,  and 
they  have  made  themselves  master  of  peculiarly  rich  and  espe- 
cially limited  supplies  of  natural  resources,  such  as  petroleum  oil, 
anthracite  coal,  and  the  Mesabi  iron  range.  The  trust  problem 
resolves  itself  into  two  classes  of  problems:  first,  the  class  of  prob- 
lems belonging  to  large-scale  business;  and  second,  the  class  of 
problems  falling  under  monopoly.  The  discussion  of  so-called 
trusts  can  be  profitably  considered  under  these  two  categories. 
There  is  no  magic  in  the  mere  word  "  trust,"  although  it  seems  to 
have  power  to  awaken  alarm  and  has  helped  produce  precipitate 
legislative  action;  whereas  action  must  be  preceded  by  an  analy- 
sis of  the  trust  problem  into  its  proper  elements  to  make  possible 
its  satisfactory  solution. 

QUESTIONS   AND   EXERCISES 

1.  Has  bigness  anything  to  do  with  monopoly?     Do  you  know  any  small 
business  which  is  a  monopoly  ?     Do  you  know  any  very  large  business  which 
is  keenly  competitive?     Contrast  a  state  of  competition  with  a  state  of 
monopoly. 

2.  Define  monopoly  and  discuss  each  point  in  the  definition. 

3.  Describe   as  fully  as  you  can  the  relation  of  industrial  evolution  to 
the  idea  of  monopoly. 

4.  Do  you  think  that  monopolists  now  show  a  worse  spirit  than  formerly  ? 
a  better  spirit?     Describe  the  monopoly  established  by  Joseph  in  Egypt. 
(Genesis,  Chap,  xlvii).      What  good  effects  did  it  have?     Is  it  apparent 
that  it  had  evil  effects? 

5.  What  do  we  understand  by  partial  monopolies  ?     What  is  there,  strictly 
speaking,  illogical  in  the  term  ?     Is  this  a  sufficient  reason  for  not  using  it  ? 

6.  Contrast  land-ownership  with  monopoly. 

7.  Explain  the  importance  of  classification  of  monopolies,  and  especially 
of  distinguishing  between  private  and  public  monopolies. 

8.  State  the  main  classes  of  monopolies,  and  give  the  divisions  and  sub- 
divisions in  each  class. 

9.  A  public  tobacco  monopoly  exists  in  France  and  produces  large  revenues. 
The  business  is  said  otherwise  to  be  well  managed.     Do  you  see  any  benefits 


MONOPOLY 


213 


that  would  accrue  from  the  establishment  of  such  a  monopoly  in  the  United 
States?   any  evil  effects? 

10.  Define  monopoly  price  and  show  how  it  is  determined. 

11.  What  does  class  price  mean?     Compare  monopoly  class  price  with 
competitive  class  price.     Explain  "use  price." 

12.  Contrast  "commodity  competition"  with  "business  unit  competition." 

13.  Why  do  we  think  of  monopoly  price  as  high  price  ?     Do  you  know  any 
monopoly  price  which  is  a  low  price?     What  do  you  mean  by  high  price? 
by  low  price  ? 

14.  What  relation  has  monopoly  to  large  fortunes?    to  small  fortunes? 
WThat,  if  any,  to  poverty? 

15.  What  is  the  wise  public  policy  with  respect  to  monopolies  ? 

16.  Describe  the  relation  of  trusts  to  monopolies. 

LITERATURE 

BAKER,  C.  W.     Monopolies  and  the  People,  Part  II. 

BULLOCK,  C.  J.     Introduction  to  the  Study  of  Economics,  Chap.  XI.    "  Trust 

Literature :  A  Survey  and  Criticism."    Quarterly  Journal  of  Economics, 

Vol.   XV,    1901,   pp.    167-216.      Reprinted  in  Ripley's  Trusts,  Pools, 

and  Corporations,  pp.  428-473. 
ELY,  R.  T.     Monopolies  and  Trusts,  Chap.  Ill,  pp.  102-104;  also  Chap.  VI, 

pp.  229-231. 
HOBSON,  J.  A.     Evolution  of  Modern  Capitalism,  new  and  revised  ed.,  1907, 

Chap.  IX. 

JENKS,  J.  W.     The  Trust  Problem. 
National  Civic  Federation  Report,  1907 :  Municipal  and  Private  Operation 

of  Public  Utilities.     3  vols. 

PRICE,  W.  H.     The  English  Patents  of  Monopoly. 
Report  of  the  Chicago  Conference  on  Trusts. 
Report  of  the  United  States  Industrial  Commission,  Vols.  I  and  II. 
RIPLEY,  W.  Z.     Trusts,  Pools,  and  Corporations;  Railway  Problems. 
SHAW,  ALBERT.     Municipal  Government  in  Great  Britain;  also,  Municipal 

Government  in  Continental  Europe,  Chap.  VI. 


CHAPTER   XIV 
MONEY 

THE  vast  system  of  valuation  and  exchange,  which  is  the  most 
characteristic  single  feature  of  present-day  economy,  rests  upon 
the  use  of  money.  Some  economic  writers  have  pictured  an  im- 
aginary primitive  state  of  "barter  economy,"  in  which,  before  the 
use  of  money,  goods  were  exchanged  directly  for  goods.  But  what 
little  definite  information  there  is  on  this  point  leads  to  the  belief 
that  about  as  soon  as  men  began  to  exchange  things,  and  conse- 
quently to  attach  exchange  value  to  them,  they  began  to  use  some 
kind  of  money — some  commodity  or  commodities  for  which  things 
were  generally  exchanged,  and  in  terms  of  which  the  values  of  other 
things  were  generally  measured. 

These  earliest  forms  of  money  were  crude  and  simple,  but  they 
sufficed  to  meet  simple  needs.  As  exchange  economy  has  ad- 
vanced through  the  growth  of  individual  and  industrial  specializa- 
tion and  the  localization  of  industry  to  the  present  complex  division 
of  labor,  the  monetary  system  has  developed  pari  passu,  the  most 
conspicuous  feature  of  this  development  in  modern  times  being  the 
growing  importance  of  credit  as  a  means  of  effecting  exchanges. 
Industrial  and  commercial  progress  has  led  to  monetary  progress, 
and  has,  in  turn,  been  stimulated  and  made  possible  by  it. 

Various  Meanings  of  the  Word  "Money."  — The  word  "money," 
like  so  many  other  terms  with  which  economics  has  to  deal,  has 
in  common  usage  no  restricted  technical  meaning,  but  may  denote 
any  one  of  a  number  of  different  things.  It  sometimes  means 
individual  wealth  of  any  sort.  A  "monied"  man  is  simply  a 
wealthy  man.  This  is,  however,  only  a  colloquial  and  purely  de- 
rivative meaning.  A  second,  and  very  common,  use  of  the  word  is 
in  the  sense  of  generally  exchangeable  purchasing  power,  whether 

214 


MONEY 


215 


this  be  embodied  in  concrete  forms  of  money,  or  exist  only  in 
the  intangible  form  of  credit.  Money  in  this  sense  is  synonymous 
with  "money  funds."  The  "money  market"  is  the  market  for 
loanable  money  funds.  When  we  speak  of  "money  income," 
"money  expenditures,"  "money  investments,"  etc.,  we  refer  to 
this  exchangeable  purchasing  power. 

Other  meanings  of  the  word  "  money "  suggest  that,  for  some 
purposes,  a  distinction  may  he  made  between  "money"  and 
credit  instruments.  But  to  look  for  any  definite  line  of  demar- 
cation, consistently  followed  in  common  usage,  or  even  in  eco- 
nomic writings,  would  be  a  vain  search.  The  element  of  credit 
is  found  in  most  forms  of  money,  even,  as  we  shall  see,  in  some 
kinds  of  metallic  money.  A  useful  and  important  distinction,  how- 
ever, is  made  by  the  very  common  practice  of  restricting  the  term 
"money"  to  those  instruments  of  general  acceptability  which  pass 
freely  from  hand  to  hand  as  media  of  exchange.  The  particular 
things  included  in  this  third  concept  of  money  vary  for  different 
periods  and  for  different  countries.  In  the  United  States  this 
freely  exchangeable  medium  includes  the  metallic  and  paper  money 
issued  by  the  federal  government,  together  with  national  bank  notes. 
Checks  drawn  by  individuals  upon  their  bank  accounts  are  not 
money,  or  money  instruments,  in  this  sense,  because  they  do  not 
pass  freely  from  hand  to  hand  as  media  of  exchange.  They  can  be 
used  only  in  making  payments  to  persons  who  know  and  have  con- 
fidence in  the  drawer,  indorser,  or  holder  of  the  check. 

This  third  meaning  of  the  word  "  money"  possesses,  as  has  been 
suggested,  the  sanction  of  a  very  common  and  prevalent  usage;  it 
corresponds,  moreover,  to  the  technical  definition  given  to  the  word 
by  many  economic  writers,  and  to  the  official  usage  of  the  United 
States  Treasury.  Some  writers,  however,  have  drawn  the  line 
between  money  and  other  means  of  payment  somewhat  differ- 
ently, either  refusing  to  count  bank  notes  as  money,  thus  limiting 
the  term  to  money  instruments  issued  by  the  government,  or  nar- 
rowing the  application  of  the  term  yet  further  by  using  it  to  denote 
only  metallic  money,  all  other  media  of  exchange  being  counted 
only  as  promises  to  pay  money. 

Yet  another,  and  still  more  restricted,  meaning  is  attached  to  the 


2l6  OUTLINES    OF    ECONOMICS 

word  when  it  is  employed  to  denote  only  that  part  of  the  stock  of 
metallic  money  which  serves  as  a  standard  of -value  as  well  as  a 
medium  of  exchange.  Although  this  extreme  limitation  of  the 
meaning  of  the  word  "  money"  is  neither  common  nor  justifiable, 
the  distinction  suggested  by  it  is  a  fundamental  one.  For,  as 
we  shall  see  presently,  the  value  of  all  other  media  of  exchange 
is  determined  by  their  relation  to  what  is  best  distinguished  by 
calling  it  standard  money. 

All  these  different  uses  of  the  word  "  money  "  imply  distinctions  of 
greater  or  less  significance,  but  for  purposes  of  economic  analysis 
the  most  important  concepts  are  the  second,  third,  and  last  in  the 
foregoing  enumeration.  Recognition  of  the  fact  that  exchangeable 
purchasing  power,  money  instruments  of  general  acceptability,  and 
the  standard  of  value  are  different  things  is  indispensable  to  clear 
thinking  in  this  field.  In  this  chapter  the  word  "  money  "  will  be 
employed  in  the  sense  of  money  instruments  of  general  accept- 
ability. 

Metallic  Money.  —  The  earliest  and  simplest  forms  of  money 
were  commodities.  Particular  commodities  came  to  serve  as 
money,  not  because  they  were  arbitrarily  designated  as  such  by 
king  or  chieftain,  but  because  they  possessed  some  properties  which 
made  them  exceptionably  exchangeable.  In  some  cases  a  primi- 
tive community  came  to  use  a  commodity  as  money  because  it  was 
something  for  which  they  had  a  dependable  "foreign  market"  - 
something,  that  is,  which  they  customarily  sold  to  other  communi- 
ties in  exchange  for  their  products.  In  other  cases  a  commodity 
which  a  community  did  not  itself  produce,  but  which  it  got  only  in 
the  course  of  trade  with  other  communities,  became  the  money 
commodity.  Or,  if  for  any  reason  a  particular  commodity  came 
to  be  particularly  esteemed  as  a  mark  of  wealth  or  a  badge  of  social 
prestige,  it  was  very  apt  to  be  used  as  money.  But  whatever  the 
original  ground  of  the  choice,  a  commodity  which  a  community 
once  began  to  think  of  as  money  had  its  exchangeability,  and  con- 
sequently its  suitability  for  monetary  uses,  increased  in  a  cumulative 
way,  just  as  to-day  most  of  us  are  willing  to  accept  anything  as 
money  which  we  think  we  can  use  as  money. 

A  great  variety  of  commodities  have  at  one  time  or  another  been 


MONEY 


217 


used  as  money.  Some  typical  examples  are  cattle,  grain,  furs,  oil, 
salt,  tobacco,  ivory,  shells,  and  tea.  But  with  the  advance  of  politi- 
cal and  economic  civilization  the  metals  have,  through  the  process 
of  the  survival  of  the  fittest,  proven  themselves  everywhere  to.be 
preeminently  and  indisputably  the  best  money  commodities. 
Copper,  silver,  and  gold  have  each  in  turn  been  chosen  as  the  prin- 
cipal money  metal  of  the  civilized  world,  the  transition  from  the 
cheaper  to  the  dearer  metals  indicating  the  growth  of  exchange  and 
the  consequent  need  of  larger  money  units. 

Metals,  and  especially  the  precious  metals,  have  certain  qualities 
that  give  them  a  peculiar  fitness  to  serve  as  money.  They  are 
durable,  easily  recognized  and  tested,  and  may  be  divided  into 
homogeneous  units  of  convenient  form  and  weight.  Moreover,  as 
compared  with  most  other  commodities,  the  precious  metals  are 
relatively  stable  in  value  —  a  fact  that  arises  in  part  from  their 
durability,  for  any  one  year's  output  of  the  mines  makes  but  a 
comparatively  small  addition  to  the  total  stock  of  metallic  money. 

Coinage.  —  When  metals  were  first  used  as  money,  they  passed 
from  hand  to  hand  simply  by  weight,  or,  in  some  cases,  in  the  form 
of  ornaments.  Coinage  speedily  developed,  however,  as  a  con- 
venient way  of  certifying  to  the  weight  and  fineness  of  money  units.1 

Such  a  guarantee  is  naturally  of  little  avail  unless  it  is  generally 
recognized  as  authoritative.  On  this  account  the  coinage  of  money 
has  almost  universally  been  regarded  as  a  prerogative  of  the  sov- 
ereign. In  England,  even  under  the  divided  sovereignty  of  the 
middle  ages,  the  coining  of  gold  and  silver  was  generally  a  privilege 
belonging  to  the  king  alone.  The  lesser  feudal  lords  and  the  char- 
tered cities  issued  token  coins,  made  of  the  baser  metals,  and  in- 
tended especially  for  local  use,  but  if  they  possessed  the  right  of 
coining  the  precious  metals,  it  was  through  a  special  grant  of  the 
king. 

Seigniorage.  —  Sovereigns  have  in  the  past  very  often  viewed 
the  monopoly  of  coinage  as  an  opportunity  for  personal  profit.  By 

1  The  names  of  many  ancient  coins  and  of  some  modern  ones  are  also  the 
names  of  weights,  although  it  has  generally  happened  that  through  successive 
debasements  of  the.  coinage  these  names  have  lost  their  original  significance. 
The  Greek  talent,  the  Jewish  shekel,  the  Roman  as,  the  English  pound,  and  the 
French  livre  are  familiar  examples. 


2l8  OUTLINES   OF  ECONOMICS 

calling  in  the  stock  of  metallic  money  in  the  country  for  recoinage, 
they  have  frequently  reduced  the  weight  of  coins  without  changing 
their  nominal  value,  thus  increasing  the  number  of  coins,  so  that  a 
handsome  profit  was  netted  for  the  royal  treasury.  Debasement 
of  the  currency  was  a  favorite  financial  expedient  of  Henry 
VIII,  of  England,  and  of  Philip  the  Fair  and  Louis  XIV,  of 
France. 

Somewhat  less  reprehensible  in  theory,  although  amounting  to 
about  the  same  thing  in  its  effects,  was  the  common  practice  of 
making  a  charge  for  coinage,  called  seigniorage.  This  practice 
was  based  on  the  idea  that  it  was  possible  to  maintain  a  dif- 
ference between  the  value  of  a  coin  and  the  value  of  the  bullion 
put  into  it.1  A  great  deal  has  been  written  about  the  possibility 
of  seigniorage,  for  the  subject  is  one  that  involves  considerations 
that  are  fundamental  in  monetary  theory.  It  has  been  often  said, 
for  example,  that  it  is  the  "government  stamp,"  rather  than  the 
metallic  content,  that  gives  value  to  a  coin.  Leaving  aside  the 
matter  of  limited  or  subsidiary  coinage  (which  will  be  considered 
presently),  we  may  dispose  of  this  statement  by  saying  that  if  it 
means  that  the  use  of  certain  metals  as  money  decreases  the  supply 
of  them  available  for  other  purposes,  and  thus  increases  their  value, 
it  is  a  truism;  but  if  it  means  that  in  coinage  we  can  add  an  arbi- 
trary and  intangible  element  of  value  to  the  metallic  content  of  the 
coin,  the  statement  is  a  false  and  misleading  doctrine  that  has  been 
disproved  over  and  over  again  by  the  monetary  experience  of 
almost  every  country. 

There  is,  however,  a  stronger  statement  of  the  theory  of  seignior- 
age. If  the  only  way  in  which  I  can  convert  bullion  into  a  medium 
of  exchange  is  by  being  content  with  750  ounces  of  money  for  every 
looo  ounces  of  bullion  I  take  to  the  mint,  will  not  the  coins  have  a 
value  one  third  greater  than  that  of  the  metal  they  contain  ?  May 
not  their  "metallic  content"  be  said  to  be,  in  a  figurative  sense, 
one  third  more  than  their  weight,  because  they  cost  me  that  much 
more  in  bullion?  If  their  bullion  value  sinks  below  this  point, 
bullion  will  not  be  brought  to  the  mint,  as  it  would  be  worth  more 

1  Under  Philip  the  Fair,  of  France,  the  seigniorage  charge  went  as  high  as 
50  per  cent.     Charges  of  from  2  to  15  per  cent  were  more  common. 


MONEY 


219 


than  the  coins  one  could  get  for  it ;  just  as  when  the  value  of  the 
coins  rises  above  this  point  the  supply  of  bullion  would  be  stimu- 
lated so  that  as  a  result  the  value  of  the  coins  would  tend  to  maintain 
this  fixed  relation  to  the  value  of  bullion.  Confidence  in  the  sta- 
bility of  the  government  may  be  assumed  in  this  reasoning;  and 
as  a  matter  of  fact,  it  is  probable  that  in  a  completely  isolated 
community  the  government  could,  through  wise  and  careful  regu- 
lations, maintain  a  constant  rate  of  profit  on  the  coinage,  with- 
out endangering  the  stability  of  the  monetary  system. 

The  fundamental  difficulty  with  seigniorage  is,  however,  that  in 
foreign  trade  coins  pass  current  only  as  bullion,  so  that  when 
seigniorage  was  charged,  the  prices  of  imported  goods,  measured 
in  money,  were  necessarily  higher  than  their  prices  measured  in 
bullion,  by  an  amount  equal  to  the  seigniorage.  It  was  impossible 
that  one  ratio  could  long  be  maintained  between  the  value  of  coined 
money  and  the  value  of  bullion  in  domestic  trade  and  another  ratio 
in  foreign  trade.  The  interdependence  of  the  prices  of  all  kinds 
of  goods  prevented  that.  Money  prices,  in  general,  always  rose ; 
that  is,  the  value  of  the  coins  sank  to  the  level  of  the  value  of  the 
bullion  they  contained.  Under  these  conditions  no  one  would 
voluntarily  undergo  the  loss  inseparable  from  taking  bullion  to  the 
mint  for  coinage,  and  with  the  cessation  of  coinage  the  profits  from 
coinage  stopped.  Every  possible  expedient,  short  of  the  absolute 
prohibition  of  foreign  trade,  was  tried  by  sovereigns  in  their  efforts 
to  retain  these  profits.1  But  market  forces  were  found  to  be 
stronger  than  royal  regulations,  which  at  best  only  served  to  retard 
somewhat  the  depression  in  the  value  of  the  official  coinage. 
About  the  only  effective  way  of  getting  seigniorage  profits  was  for 
the  sovereign  to  admit  that  the  coins  in  circulation  possessed  only 
their  bullion  value,  and  then  to  call  in  the  currency  for  recoinage 

1  The  use  of  any  other  circulating  medium  than  the  official  one  was  prohibited ; 
no  one  was  allowed  to  sell  imported  gold  or  silver,  whether  in  bullion  or  coin, 
save  to  the  royal  mint ;  if  there  were  mines  within  the  country,  they  were  some- 
times prohibited  from  disposing  of  their  products  except  to  the  royal  mint ;  gold- 
smiths were  forbidden  to  melt  down  coin  or  to  purchase  more  bullion  than  they 
needed,  and  this  they  were  forbidden  to  buy  at  less  than  the  mint  price;  restric- 
tions were  placed  on  the  export  of  bullion ;  these  and  other  similar  methods  were 
tried,  but  all  to  no  avail.  Cf.  W.  Lexis,  article  "Miinzwesen,"  in  Handworterbuch 
der  Stuatswissenschaften. 


220  OUTLINES   OF   ECONOMICS 

into  smaller  pieces,  in  the  manner  that  has  already  been  mentioned, 
thus  starting  afresh  with  a  new  seigniorage  charge.  The  result 
was  invariably  a  repetition  of  the  process  of  a  more  or  less  rapid 
depreciation  in  the  purchasing  power  of  the  coins,  leading  often  to 
further  debasements  of  the  currency. 

Modern  nations  have  abandoned  the  attempt  to  secure  profits 
from  their  monopoly  of  the  coinage.  Since  1666  England  has 
made  no  charge  whatever  for  coining  bullion  into  standard  money.1 
Most  of  the  countries  of  continental  Europe  make  a  charge  just 
sufficient  to  cover  the  expense  of  coinage.  This  charge  is  some- 
times called  seigniorage,  but  it  is  usually,  and  more  properly,  called 
brassage.  The  United  States  made  no  coinage  charge  until  1853, 
when  a  charge  of  one  half  of  i  per  cent  was  made  for  coining 
standard  money.  This  was  reduced  in  1873  and  was  abandoned 
entirely  in  1875.  At  present  the  United  States  exchanges  gold 
coins,  weight  for  weight,  for  bullion  of  standard  fineness  (nine 
tenths  gold,  one  tenth  copper)  brought  to  the  mint  in  lots  of  one 
hundred  dollars  or  more  in  value.  For  crude  bullion,  or  bullion 
not  of  standard  fineness,  gold  coins  are  exchanged  containing  as 
much  fine  gold  as  is  contained  in  the  bullion,  less  a  trifling  charge 
for  assaying,  refining,  and  for  the  alloy.2 

Instead  of  viewing  coinage  as  a  profitable  prerogative  of  the 
government,  we  have  come  to  view  it  as  a  government  duty,  to  be 
performed  at  government  expense.  The  question  of  seigniorage 
•versus  gratuitous  coinage  is  no  longer  a  live  issue.  But  the  student 
who  has  grasped  the  significance  of  the  lesson  contained  in  the  his- 
tory of  seigniorage  has  taken  an  important  step  toward  the  under- 

1  In  practice  most  of  the  gold  bullion  coined  in  England  is  supplied  to  the  mint 
by  the  Bank  of  England,  which  is  required  by  law  to  purchase  it  at  the  minimum 
price  of  £3  175.  gd.  per  ounce.        An  ounce  of  bullion  makes  £3  175.  io$d.  in 
gold  coin,  the  difference  going  to  compensate  the  bank  for  the  delay  involved  in 
getting  the  bullion  coined  at  the  mint.     In  the  United  States  the  waiting  devolves 
upon  the  government,  for  gold  coins,  or,  at  the  option  of  the  depositor,  checks 
upon  United  States  subtreasuries  or  upon  depository  banks  are  paid  to  depositors 
as  soon  as  their  bullion  can  be  weighed  and  assayed. 

2  The  coinage  mints  are  at  Philadelphia,  San  Francisco,  New  Orleans,  and 
Denver.     In  addition  there  are  assay  offices  at  New  York,  Carson,  Boise,  Helena, 
Charlotte,  St.  Louis,  Deadwood,  and  Seattle,  which  receive  bullion  on  the  same 
terms  as  the  mints,  plus  an  additional  charge  of  one  eighth  of  i  per  cent. 


MONEY  221 

standing  of  monetary  theory.  There  is  no  mysterious  element  of 
intangible  value  created  by  the  operation  of  coinage.  The  coinage 
of  standard  money  is  now  in  law,  and  always  has  been  in  fact,  a 
device  for  dividing  the  standard  money  metal  into  convenient  units 
of  certified  weight  and  fineness. 

The  Standard  of  Value.  —  We  have  seen  in  an  earlier  chapter 
that  prices  are  exchange  values  measured  in  terms  of  money. 
Goods  and  services  are  exchanged  for  money  in  certain  ratios,  and 
these  ratios  constitute  the  prices  of  the  goods  and  services.  Some 
writers  have  made  a  distinction  between  the  functions  which 
money  performs  as  a  medium  of  exchange,  and  its  functions  as  a 
measure  of  value.  These  are  not,  however,  two  different  functions, 
but  merely  two  different  aspects  of  the  same  thing.  By  the  very 
process  of  exchanging  a  commodity  for  money,  we  of  necessity 
measure  its  value  in  terms  of  money,  and  only  as  a  medium  of  ex- 
change does  money  measure  value.  We  may  speak  of  a  pound 
weight  as  an  instrument  used  in  weighing  or  as  a  measure  of  weight, 
but  we  would  all  recognize  that  this  refers  only  to  two  aspects  of 
the  same  thing. 

In  the  United  States  the  actual  medium  of  exchange  with  which 
we  measure  values  is  heterogeneous  in  that  it  comprises  a  variety 
of  coins,  made  from  different  metals,  together  with  several  kinds  of 
paper  money  of  many  different  denominations.  But  it  is  homo- 
geneous in  that  first,  all  these  different  forms  of  money  are  alike  in 
name,  —  that  is,  they  are  dollars,  or  multiples  or  fractions  of  a 
dollar,  —  and  second,  these  various  kinds  of  dollars  are  identical 
in  value.  This  familiar  and  very  satisfactory  condition  of  uni- 
formity in  the  units  in  which  we  measure  value  does  not,  however, 
suggest  to  us  the  real  nature  of  the  value  of  money  in  the  way  that  a 
less  perfect  monetary  system  would. 

It  would  be  possible  to  have  a  number  of  different  monetary 
units,  just  as  the  weight  or  size  of  an  object  may  be  stated  in  terms 
of  either  the  metric  system  or  the  English  system  of  weights  and 
measures.  In  fact,  before  the  United  States  had  an  adequate 
monetary  system  of  its  own,  the  actual  medium  of  exchange  con- 
sisted largely  of  English,  French,  Spanish,  and  Portuguese  coins, 
and  there  were  as  many  different  ways  of  stating  prices,  that  is,  of 


222  OUTLINES    OF   ECONOMICS 

measuring  values,  as  there  were  units  of  value.1  Nor  does  the 
mere  name  of  "dollar"  give  to  different  pieces  of  money  a  uniform 
value.  The  silver  dollar  of  Mexico  is  worth  only  about  half  as 
much  as  the  silver  dollar  of  the  United  States,  although  it  is  of  ap- 
proximately the  same  size.  More  significant,  however,  is  the  fact 
that  in  the  United  States  we  have  had  at  different  times  "dollars" 
of  unequal  value. 

What  is  it,  then,  that  gives  uniformity  to  the  dollar  as  a  unit  of 
value  in  our  present  monetary  system  ?  To  say  that  various  kinds 
of  money  are  equal  in  value  because  they  will  purchase  the  same 
amounts  of  goods  is,  obviously,  to  argue  in  a  circle.  But  the  an- 
swer is  found  in  the  fact  that  they  are  interchangeable,  and  so  long 
as  any  number  of  kinds  of  money,  all  named  in  dollar  units,  are 
freely  exchangeable,  dollar  for  dollar,  it  is  impossible  that  a  dollar 
in  one  kind  of  money  should  be  worth  more  than  a  dollar  in  any 
other  kind  of  money.  We  do  not  refer  here  to  the  fact  that  the 
different  kinds  of  money  are  exchanged  for  each  other  at  par  in 
business  transactions  and  in  banking,  for  this  is  a  result,  rather 
than  a  cause,  of  the  uniform  value  of  the  money  units.  The  ex- 
changeability that  underlies  the  uniform  value  of  our  different 
kinds  of  money  is  maintained  by  the  federal  government. 

All  coins  smaller  than  a  dollar  are  by  law  exchangeable  at  the 
United  States  Treasury  for  "lawful  money,"  which  includes  gov- 
ernment notes,  silver  dollars,  and  gold  coins.  Government  notes, 
in  turn,  are  simply  promises  to  pay,  which  are  redeemable  in  gold 
at  the  government  Treasury.  While  there  is  no  definite  legal  man- 
date requiring  the  redemption  of  silver  dollars  in  gold,  yet  the  cur- 

1  An  instructive  bit  of  monetary  experience  may  be  found  in  the  efforts  of 
some  of  the  colonies  to  reduce  this  foreign  money,  especially  Spanish  money, 
to  the  English  system  of  pounds,  shillings,  and  pence,  in  which  accounts  were 
generally  kept.  They  were  not  content  with  a  simple  official  statement  of  the 
actual  ratios  between  the  different  value  units,  but  sought  to  give  an  artificially 
enhanced  value  to  the  foreign  coins  by  increasing  the  number  of  shillings  to  which 
they  were  to  be  considered  equivalent.  The  result  was  not,  however,  an  increase 
in  the  value  of  the  coins,  but  a  decrease  in  the  value  of  the  nominal  "shilling" 
in  which  accounts  were  kept.  This  was  the  origin  of  the  now  rapidly  vanishing 
use  of  the  word  "shilling"  as  equivalent  to  12^  cents  in  some  localities  and  to 
1 6$  cents  in  others.  The  student  may  find  an  instructive  parallel  in  this  experi- 
ence and  the  official  statements  of  coin  values  by  which  sovereigns  tried  to  retain 
their  seigniorage  profits. 


MONEY 


223 


rency  act  of  1900  makes  it  the  duty  of  the  Secretary  of  the  Treasury 
to  maintain  all  other  forms  of  money  at  a  parity  with  gold  —  a 
requirement  which  means  that  he  would  have  to  redeem  silver 
dollars  in  gold  if  such  action  should  at  any  time  be  needed  to 
maintain  their  parity.  Gold  certificates  and  silver  certificates,  are 
simply  a  mechanism  for  putting  gold  and  silver  money  into  circu- 
lation in  convenient  form.  They  are  analogous  to  warehouse  re- 
ceipts, because  they  represent  gold  coins  and  silver  dollars  that  are 
stored  in  the  government  Treasury  to  the  full  amount  of  the  certifi- 
cates issued,  and  which  may  be  obtained  at  any  time  in  exchange 
for  the  certificates.  National  bank  notes,  which  constitute  a  large 
part  of  our  actual  circulating  medium,  are  redeemed  at  the  federal 
Treasury  in  government  notes.  In  practice  the  government  is  con- 
tinually receiving  all  kinds  of  money,  including  silver  dollars,  and 
exchanging  other  kinds  of  money  for  them. 

The  significant  thing  is  that  all  other  kinds  of  money  are  exchange- 
able, directly  or  indirectly,  for  gold  coin.  In  the  case  of  gold  coin, 
there  is* a  further  kind  of  exchangeability  —  the  unlimited  and 
free  convertibility  of  gold  coin  and  gold  bullion.  So  long  as  any 
one  can  secure  gold  coin  in  any  amount  for  the  same  weight  of  gold 
bullion  of  standard  fineness,  and  so  long  as  gold  coin  can  be  freely 
melted  down  into  gold  bullion,  it  is  impossible  that  there  should  be 
any  difference  between  the  value  of  a  gold  coin  and  the  value  of  its 
metallic  content.  We  have,  then,  not  only  the  interchangeability  of 
all  parts  of  the  circulating  medium,  but  also  the  positive  physical 
identity  of  one  part  of  it  and  the  material  of  which  this  part  is  made. 
Gold,  whether  in  coin  or  bullion,  constitutes  the  standard  of  value, 
for  it  is  the  value  of  gold  that  fixes  the  value  of  the  dollar.  The 
measuring  of  values  in  terms  of  dollars  through  the  exchange  of 
goods  and  services  for  money  of  different  sorts,  the  equalizing  of 
the  values  of  dollars  in  all  varieties  of  money  through  their  ex- 
changeability, and  the  automatic  standardization  of  the  value  of 
the  dollar  through  the  free  and  unlimited  coinage  of  gold l ;  —  these 
are  the  fundamental  facts  of  our  monetary  system. 

1  In  fixing  the  value  of  coins  at  the  value  of  their  metallic  content,  unlimited 
coinage  is  of  more  importance  than  free  coinage,  as  the  history  of  seigniorage 
shows.  Some  writers  have  emphasized  the  importance  of  the  legal  tender  quality 


224  OUTLINES    OF   ECONOMICS 

Gold  coins,  because  their  value  as  bullion  is  equal  to  their  value 
as  coins,  constitute  standard  money.  The  gold  dollar  weighing 
25.8  grains,  and  containing  23.22  grains  of  fine  gold,  is  by  law  the 
unit  of  value.  The  coinage  of  the  gold  dollar  was  discontinued  in 
1890,  but  the  gold  coins  that  are  minted  contain  precisely  this 
amount  of  gold  per  dollar. 

Limited  Coinage.  —  Gold  is  the  only  metal  which  is  made  into 
coins  by  the  United  States  government  for  any  one  who  deposits 
bullion  at  the  mints  or  assay  offices.  All  other  coins  are  made 
from  metal  purchased  from  time  to  time  for  that  purpose  as  Con- 
gress may  direct.  In  none  of  these  coins  is  the  bullion  worth  as 
much  as  the  coin.  In  1878,  when  the  United  States  began  the 
limited  coinage  of  silver  dollars,  the  value  of  the  371^  grains  of  pure 
silver  in  a  silver  dollar  was  about  89  cents.  The  value  of  silver  de- 
clined steadily  until  1902,  when  371^  grains  of  silver  were  worth 
only  41  cents.  Since  that  time  there  has  been  a  slight  upward  move- 
ment, but  nevertheless  the  present  (1908)  bullion  value  of  a  silver 
dollar  is  only  about  one  half  its  value  as  a  coin.  The  bullion  value 
of  the  smaller  silver  coins  is  still  less,  for  they  contain  but  347.22 
grains  of  silver  to  the  dollar,  while  the  bullion  value  of  our  nickel 
and  bronze  coins  is  yet  smaller,  relatively. 

Such  coins  are  sometimes  called  "token  coins,"  the  implication 
being  that  the  fact  that  they  pass  from  hand  to  hand  at  their  full 
nominal  value  is  merely  a  matter  of  habit  or  usage,  supported  by 
general  acquiescence.  More  accurately,  however,  they  are  credit 
coins,  because  the  excess  of  their  coin  value  over  their  bullion  value 
depends  ultimately,  as  we  have  seen,  upon  the  good  faith  and  credit 
of  the  government,  evidenced  by  their  redeemability  in  gold.  If, 
for  example,  a  catastrophy  should  overthrow  the  present  federal 
government,  and  if  the  new  government  should  refuse  to  recognize 
the  obligations  of  the  old,  nothing  could  prevent  these  coins  from 
sinking  to  their  bullion  value. 

in  this  connection.  But  experience  has  shown  that  while  the  fact  that  money  must 
be  accepted  by  a  creditor  at  full  value  sometimes  makes  an  otherwise  undesirable 
kind  of  money  a  "generally  acceptable  medium  of  exchange,"  it  does  not  suffice 
to  maintain  its  value,  so  far  as  prices  made  after  such  money  has  been  issued  are 
concerned. 


MONEY 


225 


A  very  considerable  profit  accrues  to  the  government  from  this 
limited  coinage.  The  difference  between  the  amount  paid  for 
silver  bullion  from  1878  to  1907,  and  the  value  of  the  coins  made 
from  it,  amounted  to  $143,000,000.  In  the  accounts  of  the  federal 
treasury  this  profit  is  called  seigniorage,  but  it  is  to  be  carefully 
distinguished  from  real  seigniorage,  —  a  charge  exacted  for  the 
conversion  of  standard  bullion  into  standard  coin.  If  the  federal 
government  should  issue  a  general  balance  sheet  of  the  kind  used 
in  corporation  accounting,  the  credit  element  in  its  outstanding 
limited  coinage  would  properly  appear  as  a  liability,  which  might 
be  greater  or  less  than  the  profits  that  had  accrued  on  such  coinage, 
depending  upon  whether  the  present  value  of  the  bullion  in  the 
coins  happened  to  be  greater  or  less  than  the  prices  which  the  gov- 
ernment had  paid  for  it. 

Bimetallism.  —  A  monetary  system  like  the  present  one  of  the 
United  States  is  a  single  standard  system,  because  only  one  com- 
modity is  used  as  a  standard  of  value.  The  double  standard  system, 
under  which  two  different  commodities  serve  concurrently  as 
legal  standards  of  value,  has,  however,  been  used  in  the  past 
by  many  governments,  including  our  own,  and  its  superiority 
over  the  single  standard  system  has  been  alleged  by  many  advo- 
cates. Practically  the  only  commodities  that  civilized  nations 
have  used  as  standards  of  value  in  modern  times  are  gold  and 
silver.  The  question  of  the  double  standard  resolves  itself, 
accordingly,  into  the  question  of  the  bimetallic  standard,  which 
means  in  practice  the  unlimited  coinage  of  both  gold  and 
silver. 

Bimetallism  does  not  mean,  in  theory,  as  might  be  supposed,  the 
establishment  of  two  different  monetary  units  of  different  names, 
one  measured  by  the  value  of  a  certain  amount  of  silver,  the  other 
by  the  value  of  a  certain  amount  of  gold,  prices  being  measured 
according  to  convenience  in  terms  of  either  unit.  On  the  contrary, 
it  contemplates  the  establishment  of  one  nominal  unit,  such  as  the 
dollar,  to  be  measured  at  the  same  time  by  the  value  of  either  a  defi- 
nite amount  of  gold  or  a  definite  amount  of  silver.  More  concretely 
this  means  the  opening  of  the  mints  to  the  unlimited  coinage  of  both 
gold  and  silver  into  dollars,  or  dollar  multiples,  the  amount  of  silver 
Q 


226  OUTLINES   OF   ECONOMICS 

in  a  silver  dollar  and  the  amount  of  gold  in  a  gold  dollar  being 
established  by  law. 

Many  of  the  arguments  that  have  been  advanced  by  bimetallists 
have  related  to  the  alleged  immediate  advantages  to  be  secured 
from  the  adoption  of  the  double  standard  under  particular  condi- 
tions of  time  and  place.  One  argument,  however,  of  more  general 
significance  is  based  on  the  probable  greater  stability  in  value  of 
the  double  standard.  Silver  and  gold  are  produced  under  some- 
what different  conditions,  and  are  used  for  somewhat  different  pur- 
poses. It  has  been  suggested  that  tendencies  toward  fluctuations 
in  the  value  of  silver  and  gold  would,  therefore,  be  as  apt  to  be  in 
opposite  directions  as  in  the  same  direction,  and  that  so  far  as  they 
were  in  opposite  directions  they  would  tend  to  counterbalance  each 
other. 

Most  opponents  of  bimetallism,  while  admitting  that,  if  feasible, 
it  might  possess  some  advantages,  deny  its  possibility.  The  diffi- 
culty is,  they  maintain,  that  while  the  ratio  of  the  weight  of  gold  in 
the  monetary  unit  to  the  weight  of  silver  in  the  monetary  unit  has 
to  be  fixed  and  definite,  the  ratio  of  the  value  of  gold  to  the  value  of 
silver  is  not  fixed  and  definite,  but  is  subject  to  the  fluctuations 
of  the  market.  If  one  metal  is  relatively  undervalued  and  the  other 
relatively  overvalued  by  the  legal  ratio,  the  result  will  be  that  only 
the  overvalued  metal  will  be  brought  to  the  mint  for  coinage,  for  the 
undervalued  metal  will  be  worth  no  more  than  the  overvalued  one 
as  coin,  but  will  be  worth  more  as  bullion.  The  actual  result  will 
be,  in  such  a  case,  not  a  bimetallic  standard,  but  a  single  standard 
composed  of  the  metal  which,  at  the  mint  ratio,  is  the  cheaper. 
Moreover,  if,  by  a  change  in  the  relative  market  values  of  the  two 
metals,  this  one  in  turn  becomes  undervalued  by  the  mint  ratio, 
the  standard  coins  composed  of  that  metal  that  are  already  in  use 
will,  according  to  Gresham's  law,1  disappear  from  circulation, 
being  hoarded,  melted  down,  or  exported,  and  the  other  metal  will 
take  its  place  as  the  actual  standard  of  value. 

1  Gresham's  law  is  that  "bad  money  drives  out  good,'"'  or  that  "the  cheaper 
money  drives  out  the  dearer."  Sir  Thomas  Gresham,  master  of  the  mint  under 
Queen  Elizabeth,  came  to  this  conclusion  as  a  result  of  his  observation  of  the 
difficulties  encountered  by  that  sovereign  in  her  attempts  to  improve  the  condition 
of  the  debased,  worn,  and  mutilated  coinage  bequeathed  to  her  by  her  predecessors. 


MONEY 


227 


All  but  the  most  extreme  bimetallists  would  admit  the  impossi- 
bility of  establishing  and  maintaining  a  coinage  ratio  between  the 
two  metals  that  would  differ  by  any  considerable  margin  from  the 
ratio  corresponding  to  their  market  values,  but  they  maintain  that 
a  mint  ratio  established  as  nearly  as  possible  to  the  prevailing 
market  ratio  will  have  a  steadying  influence  upon  the  latter  that 
will  tend  to  prevent  any  wide  divergence  between  the  two.  If  one 
metal  should  rise  in  value  to  such  an  extent  that  it  would  not  pay 
to  use  it  as  money,  more  of  the  other  metal  would  be  used  for  mone- 
tary purposes,  thus  decreasing  the  supply  of  it  available  for  other 
uses  and  consequently  enhancing  its  value.  The  net  effect  would 
be,  it  is  claimed,  a  tendency  toward  the  equilibrium  of  the  value  of 
the  two  metals  at  the  coinage  ratio. 

The  appeal  to  history  has  been  used  both  by  bimetallists  and 
their  opponents.  The  claim  of  the  monometallists  that  legal  bi- 
metallism is  apt  to  mean  actual  monometallism,  with  the  relatively 
cheaper  metal  as  the  standard,  has  been  substantiated  many  times 
in  the  monetary  experience  of  different  nations.  The  automatic 
change  from  one  single  standard  to  the  other,  following  a  change 
in  market  values,  is  also  a  phenomenon  that  has  been  illustrated  by 
a  large  number  of  concrete  cases.  On  the  other  hand,  the  bimetal- 
lists  are  able  to  point  to  some  apparently  successful  bimetallic  sys- 
tems, such  as  that  of  France  in  the  eighteenth  century.  But  it  is  a 
significant  fact  that  no  real  bimetallic  system  has  been  able  to  en- 
dure for  any  considerable  time  except  when  the  annual  production  of 
gold  and  silver  was  relatively  small  and  relatively  stable,  and  where 
international  trade  was  a  relatively  unimportant  item.  There  is  no 
scientific  student  of  monetary  problems  who  believes  that  it  would 
be  possible  for  any  nation  to  maintain  independently  the  double 
standard  under  the  present  conditions  of  a  large  and  fluctuating 
annual  production  of  the  precious  metals,  coupled  with  an  inter- 
national commerce  of  vast  proportions. 

International  bimetallism,  that  is,  the  adoption  by  each  of  the 
leading  nations  of  a  bimetallic  standard,  at  a  ratio  fixed  by  national 
agreement,  has  had  many  supporters,  even  among  those  who  do  not 
believe  in  the  practicability  of  national  bimetallism,  and  repre- 
sentatives of  different  nations  have  assembled  in  several  inter- 


228  OUTLINES   OF  ECONOMICS 

national  monetary  conferences  for  the  discussion  of  this  subject 
International  bimetallism  would  remove  one  difficulty  experienced 
in  the  attempts  made  by  different  nations  to  maintain  independent 
bimetallic  systems  at  even  slightly  differing  ratios,  —  and  that  is, 
the  tendency  for  each  metal  to  flow  from  the  countries  in  which  it  is 
relatively  undervalued  in  the  mint  ratio  to  the  countries  in  which 
it  is  relatively  overvalued.  Other  difficulties,  however,  would  still 
remain,  and  the  possibility  of  maintaining  an  actual  bimetallic 
standard  even  under  international  agreement,  supposing  that  were 
possible,  is  open  to  very  serious  doubt. 

The  waning  of  public  interest  in  the  question  of  bimetallism  in 
recent  years  is  of  great  significance,  because  it  indicates  that  the 
real  moving  forces  behind  the  bimetallist  propaganda  have  not  been 
any  real  or  assumed  points  of  superiority  of  general  significance 
that  may  be  imputed  to  a  multiple  standard,  but  rather  that  certain 
specific  results  that  would  flow  from  the  adoption  of  bimetallism 
at  a  particular  time  and  place  have  been  desired.  More  specific- 
ally, bimetallism  has  been  supported  by  those  who  have  desired 
"cheaper  money,"  and  these  have  been  particularly  active  when 
the  monetary  standard  in  actual  use  has  been  increasing  in  value; 
that  is,  when  prices  in  general  have  been  decreasing.  The  recent 
great  increase  in  the  world's  production  of  gold  has,  temporarily  at 
least,  taken  bimetallism  out  of  the  list  of  economic  problems  of 
general  public  interest. 

Bimetallism  in  the  United  States.  —  The  national  monetary  sys- 
tem was  established  by  act  of  Congress  in  I792.1  The  mint  was 
opened  to  the  free  and  unlimited  coinage  of  both  gold  and  silver, 
the  silver  coins  containing  371^  grains  of  fine  metal  per  dollar,  and 
the  gold  coins  24!  grains  per  dollar,  the  ratio  of  15  to  i  being  thus 
established.  It  was  soon  found,  however,  that  gold  was  worth  in 
the  market  slightly  more  than  fifteen  times  as  much  as  silver,  and 

1  The  act  of  1792  followed  in  detail  the  -recommendations  of  a  Report  of  the 
Establishment  of  a  Mint,  by  Alexander  Hamilton,  then  Secretary  of  the  Treasury. 
Hamilton  incorporated  some  of  the  recommendations  contained  in  earlier  reports 
by  Robert  Morris  and  Thomas  Jefferson.  Hamilton's  Report  has  been  frequently 
reprinted,  but  it,  together  with  the  reports  of  Morris  and  Jefferson  and  other 
pertinent  documents,  may  be  conveniently  found  in  the  Report  of  the  International 
Monetary  Conference  of  1878. 


MONEY 


229 


as  a  consequence  but  little  gold  was  brought  to  the  mint  for  coinage, 
while  the  gold  that  was  coined  illustrated  Gresham's  law  by  speedily 
disappearing  from  circulation. 

Silver  dollars,  too,  disappeared  from  circulation,  but  for  another  reason. 
They  were  somewhat  lighter  than  the  Spanish  dollars  which  were  in  general 
circulation  at  the  time,  and  would,  under  the  operations  of  Gresham's  law, 
have  driven  the  latter  out  of  circulation,  had  it  not  been  that  the  Spanish 
dollar  commanded  a  slight  premium  over  the  American  dollar  in  ordinary 
purchases.  But  the  American  dollars,  on  account  of  their  new  and  attractive 
appearance,  could  be  used  as  'dvantageously  as  the  Spanish  dollars  in  trade 
with  the  Spanish  possessions  in  America.  They  were  consequently  taken 
from  the  country  for  that  purpose,  while  Spanish  dollars  were  brought 
back  and  were  often  recoined  into  a  larger  number  of  American  dollars. 
This  wasteful  coinage  of  silver  dollars  was  stopped  in  1806  by  order  of 
President  Jefferson,  leaving  the  mint  open  to  the  coinage  only  of  gold,  smaller 
silver  coins,  and  minor  coins.  As  a  matter  of  fact  American  coins  made  up 
only  an  insignificant  part  of  our  circulating  medium  before  1834. 

Realizing  the  impossibility  of  maintaining  a  gold  coinage  under 
such  conditions,  Congress,  in  1834,  changed  the  legal  ratio  to  16  to  i 
by  reducing  the  weight  of  the  gold  dollar.  By  this  step,  however, 
they  went  too  far  in  the  other  direction,  for  silver  was  undervalued 
at  this  ratio,  and  while  the  number  of  gold  coins  increased,  but  little 
silver  was  brought  to  the  mint,  and  silver  coins  quickly  disappeared 
from  circulation.  In  order  to  secure  a  supply  of  small  change, 
Congress  was  forced,  in  1853,  to  abandon  the  principle  of  the  free 
and  unlimited  coinage  of  silver  coins  smaller  than  a  dollar,  and  to 
order  that  they  should  be  coined,  as  at  present,  only  from  bullion 
purchased  by  the  government  at  the  market  price.  At  the  same 
time  the  weight  of  these  subsidiary  coins  was  reduced  by  one 
seventh  to  insure  their  being  retained  in  circulation. 

The  discovery  of  gold  in  California,  in  1848,  and  in  Australia,  in 
1851,  suddenly  increased  the  world's  supply  of  gold  by  an  unprece- 
dented amount.  In  fact,  the  careful  estimates  of  Dr.  Soetbeer  indi- 
cate that  as  much  gold  was  produced  in  the  third  quarter  of  the 
nineteenth  century  as  in  the  preceding  three  centuries  and  a  half 
following  the  discovery  of  America.  The  result  was  to  increase  the 
discrepancy  between  the  mint  ratio  and  the  actual  market  ratio  of 
gold  and  silver,  although  the  production  of  silver  had  also  been 


230  OUTLINES   OF  ECONOMICS 

greatly  increased.  Gold  was  brought  to  the  mint  for  coinage  in 
enormous  amounts,  —  a  condition  that  lasted  even  after  1861,  when 
paper  currency  began  to  be  used  almost  exclusively  as  the  medium 
of  exchange. 

In  a  general  revision  of  the  coinage  laws,  enacted  in  1873,  the 
silver  dollar  was  dropped  from  the  list  of  coins  that  could  be  manu- 
factured at  the  mint.  Although  this  action  was  almost  unnoticed 
at  the  time,  a  fictitious  significance  has,  in  subsequent  years,  been 
attached  to  it.  Silver  was  practically  "demonetized,"  that  is,  its 
free  and  unlimited  coinage  was  actually  prevented,  by  the  estab- 
lishment of  the  ratio  of  1 6  to  i  in  1834.  The  act  of  1873  gave  legal 
recognition  to  an  existing  fact. 

But  a  sudden  depreciation  in  the  value  of  silver,  which  began  at 
about  this  time,  brought  the  question  of  bimetallism  again  into  the 
foreground.  Since  the  seventeenth  century  the  relative  values  of 
gold  and  silver  had  fluctuated  only  between  relatively  narrow  mar- 
gins, and  in  no  year  since  the  establishment  of  the  United  States 
mint  had  the  average  annual  value  of  an  ounce  of  gold  been  less 
than  15  or  more  than  16^  times  the  value  of  an  ounce  of  silver.  In 
1875,  however,  the  market  ratio  fell  to  1 6.6  to  i;  by  1878  it  was 
18  to  i;  by  1886  it  was  20.8  to  i;  and  in  1894  it  was  32.6  to  i.1  It 
is  evident  that  if  the  opportunity  for  the  free  and  unlimited  coinage 
of  silver  at  the  ratio  of  16  to  i  had  still  existed,  there  would  have 
been  another  sudden  change  in  the  actual  standard  of  value.  Gold 
would  have  been  undervalued  by  that  ratio,  and  would  have  disap- 
peared from  circulation,  and  silver  would  have  taken  its  place.  It 
was  the  realization  of  this  fact,  coupled  with  the  knowledge  that  the 
silver  standard  would  mean  a  "cheaper  dollar,"  that  led  to  a  popu- 
lar agitation  for  the  free  and  unlimited  coinage  of  silver  which 
continued  for  more  than  twenty  years. 

The  first  tangible  result  of  this  agitation  was  a  compromise  meas- 

1  The  causes  of  this  unprecedented  decline  in  the  relative  value  of  one  of  the 
precious  metals  were  complex  and  intricate.  The  following  may  be  mentioned, 
however,  as  contributing  circumstances:  (i)  Cessation  of  an  extraordinary  de- 
mand for  silver  in  India  which  had  existed  since  1850;  (2)  Stoppage  of  the  unlim- 
ited coinage  of  silver  in  several  European  countries;  (3)  Discovery  of  large  silver 
mines  in  the  United  States;  (4)  Increase  in  the  value  of  gold,  as  evidenced  by  a 
general  decrease  in  the  prices  of  commodities. 


MONEY 


23I 


ure,  the  Bland-Allison  Act,  passed  by  Congress  in  1878,  which  in- 
stituted the  limited  coinage  of  silver  dollars  by  authorizing  the  sec- 
retary of  the  treasury  to  purchase  at  market  prices  not  less  than 
$2,000,000  nor  more  than  $4,000,000  worth  of  silver  bullion  per 
month,  and  to  coin  it  into  dollars.  The  results  of  this  enforced 
coinage  were  satisfactory  to  neither  party  to  the  controversy.  The 
amount  of  silver  coined  was  in  excess  of  the  demand  for  that  bulky 
kind  of  money,  even  though  as  much  as  possible  was  put  into  circu- 
lation in  the  form  of  silver  certificates,  and  although  the  govern- 
ment tried  to  favor  the  distribution  of  silver  by  paying  the  expense 
of  transporting  it  to  the  localities  where  it  was  wanted.  The  move- 
ment in  favor  of  the  unlimited  coinage  of  silver  continued  to  gain 
in  strength,  however,  its  advocates  claiming  that  "more  silver," 
rather  than  less,  was  needed. 

A  second  compromise  was  effected  in  the  Sherman  act  of  1890, 
which  provided  for  the  increase  in  the  amount  of  silver  purchased 
to  4,500,000  ounces  each  month,  which  was  to  be  paid  for  in  treas- 
ury notes.  These  treasury  notes  were  to  be  full  legal  tender,  and 
were  redeemable  in  gold  or  silver  coin  at  the  discretion  of  the  secre- 
tary of  the  treasury.  The  silver  was  to  be  coined  only  so  rapidly  as 
was  found  necessary  for  the  redemption  of  the  treasury  notes.  The 
increase  in  the  amount  of  silver  purchased  was  a  concession  to  the 
advocates  of  the  unlimited  coinage  of  silver;  the  fact  that  the  circu- 
lating medium  based  immediately  on  these  purchases  was  com- 
posed of  treasury  notes,  which  were  injected  into  circulation  in 
proportion  to  the  market  value  of  the  silver  purchased,  was  a  con- 
cession to  their  opponents. 

The  soundness  of  the  principles  embodied  in  the  Sherman  act 
was  soon  tested  by  a  period  of  financial  and  industrial  depression. 
Gold  had  to  be  exported  to  Europe  in  large  quantities  to  settle  an 
adverse  balance  of  trade,  and  the  government  found  difficulty  in 
maintaining  its  own  gold  reserve,  which  was  already  seriously 
threatened  by  a  decline  in  customs  receipts,  accompanied  by  an  in- 
crease in  federal  expenditures.  The  gold  reserve  was  at  that  time 
simply  the  amount  of  gold  in  the  treasury  that  was  available  for  the 
redemption  of  other  forms  of  money,  —  especially  the  United 
States  notes,  or  greenbacks,  that  had  been  first  issued  during  the 


232  OUTLINES   OF   ECONOMICS 

Civil  War,  but  which  did  not  become  actually  redeemable  in  gold 
until  1879.  During  this  scarcity  of  gold  the  banks  were  able  to 
secure  gold  for  their  own  reserves  or  for  export  by  presenting 
United  States  notes  at  the  treasury  for  redemption  in  gold.  Under 
the  law  the  notes  had  to  be  immediately  reissued,  and  were  used  in 
government  payments,  but  no  sooner  was  this  done  than  they  were 
again  returned  by  the  banks  for  redemption  in  gold. 

The  workings  of  this  "endless  chain  "  by  which  gold  was  pumped 
from  the  government  treasury  were  aggravated  by  the  fact  that  the 
treasury  notes  authorized  by  the  Sherman  act  were  used  for  the 
same  purpose.  Although  they  were  payable  either  in  gold  or  silver 
coin,  they  were  actually  redeemed  on  demand  in  gold.  This  was 
at  the  urgent  insistence  of  President  Cleveland,  who  believed,  with 
good  reason,  that  a  refusal  to  redeem  them  in  gold  would  probably 
have  forced  the  silver  standard  upon  us,  by  destroying  the  ex- 
changeability of  silver  and  gold  and  thus  putting  an  end  to  their 
parity,  and  that  it  would  certainly  have  injured  the  credit  of  the 
government  and  put  it  to  a  disadvantage  in  the  bond  sales  that 
were  needed  to  replenish  the  gold  reserve.  Under  the  operations 
of  the  Sherman  act  the  government  was  virtually  exchanging  gold 
coin  for  silver  bullion  at  a  time  when  gold  was  sorely  needed  and 
when  the  value  of  the  purchased  silver  was  steadily  depreciating. 

The  gold  reserve  sank  from  $190,000,000  in  1890  to  $95,000,000 
in  1893.  In  June  °f tne  latter  year  the  closing  of  the  mints  of  India 
to  the  unlimited  coinage  of  silver  gave  an  added  impetus  to  the 
downward  movement  of  the  value  of  that  metal.  These  facts  led 
Congress,  in  a  special  session  called  in  1893  f°r  tnat  purpose,  to 
order,  though  with  obvious  reluctance,  that  the  purchase  of  silver 
under  the  Sherman  act  should  be  stopped. 

The  agitation  for  the  free  and  unlimited  coinage  of  silver  con- 
tinued, however,  and  with  increased  vigor,  and  it  was  made  the  sole 
issue  in  the  presidential  campaign  of  1896.  It  was  alleged  that  the 
yet  continuing  industrial  depression  could  be  alleviated  only  by 
"more  money"  and  "cheaper  money."  It  was  claimed  by  many 
intelligent  people  that  the  unlimited  coinage  of  silver  would  not 
drive  gold  from  circulation,  but  would  increase  the  value  of  silver 
and  decrease  the  value  of  gold  until  they  met  at  a  parity  established 


MONEY 


233 


by  the  desired  legal  ratio  of  16  to  i.  The  most  effective  argument 
of  the  protagonists  of  silver  was  found,  however,  in  the  admitted 
fact  that  the  value  of  gold,  as  shown  by  changes  in  the  general  price 
level,  had  been  increasing.  All  indications  pointed  toward  a  con- 
tinued decrease  in  the  annual  production  of  gold,  and  a  consequent 
further  increase  in  its  value.  This,  it  was  argued,  was  a  hardship 
to  those  who  had  borrowed  money  on  long  time  obligations,  such 
as  mortgages,  because  they  would  be  forced  to  repay  in  value  or 
purchasing  power  more  than  they  had  borrowed.1 

This  agitation  was,  in  fact,  simply  one  of  a  series  of  cheap  money 
movements  that  have  characterized  the  economic  development  of 
the  United  States,  and  which  have  sprung  from  the  fact  that  the 
expense  of  opening  up  and  developing  new  lands  has  necessitated 
expenditures  of  capital  in  an  amount  far  beyond  the  resources  of 
the  actual  settlers.  Newly  settled  regions  have  usually  been 
debtor  regions,  and  there  is  more  than  mere  coincidence  in  the  fact 
that  demands  for  cheap  money  have  always  been  voiced  most 
loudly  on  the  frontier.2  This  does  not  mean  that  a  cheap  money 
movement  is  essentially  dishonest;  that  it  represents  the  conscious 
attempts  of  debtors  to  escape  the  payment  of  their  lawful  debts. 
The  life  and  vigor  in  this  movement  for  the  unlimited  coinage  of 
silver  was  put  into  it  by  men  who  saw  the  imputed  value  of  their 
assets  sinking  and  the  difficulty  of  paying  their  debts  increasing  in 
a  financial  crisis  for  which  they  were  not  individually  responsible. 
Money  funds  were  hard  to  get  because  individual  credit,  the  founda- 
tion of  bank  credit,  was  lacking.  This  scarcity  of  money  funds 
was  confused,  naturally,  if  erroneously,  with  the  scarcity  of 
"money"  in  the  sense  of  standard  money, — gold;  and  the  remedy 
was  sought  in  an  action  that  would  give  more  and  cheaper  standard 
money. 

The  defeat  of  the  advocates  of  bimetallism  in  1896  would  prob- 
ably not  have  stopped  the  agitation  for  the  unlimited  coinage  of 
silver,  had  it  not  been  for  the  return  of  prosperous  conditions, 

1  This  argument  raises  the   problem  of  the  standard  of  deferred  payments, 
which  is  to  be  considered  in  Chapter  XVI. 

2  Cf.  C.   J.   Bullock,  Essays  in  the  Monetary  History  of  the  United  States, 
Part  I. 


234  OUTLINES   OF   ECONOMICS 

coupled  with  an  enormous  increase  in  the  world's  annual  produc- 
tion of  gold,  which  has  brought  with  it  a  general  increase  in  prices. 

The  single  gold  standard  was  formally  and  definitely  recognized 
by  law  in  1900.  All  of  the  silver  bullion  purchased  under  the 
Sherman  act  has  been  coined,  and  silver  dollars  sufficient  in 
amount  to  retire  the  treasury  notes  have  been  set  aside  for  that 
purpose.  These  treasury  notes  (which  should  not  be  confused 
with  United  States  notes,  or  greenbacks)  are  accordingly  on  sub- 
stantially the  same  basis  as  silver  certificates.  Up  to  June  30, 1907, 
their  amount  had  been  reduced  from  $156,000,000  to  $6,000,000. 
No  silver  dollars  have  been  coined  since  1904,  and  under  the  present 
law  no  more  can  be  coined  until  Congress  authorizes  the  special 
purchase  of  bullion  for  that  purpose. 

The  Dominance  of  the  Gold  Standard.  —  Within  the  last  few 
years  gold  has  been  accepted  more  generally  and  more  definitely 
than  ever  before  as  the  standard  money  metal  of  the  world.  The 
change  from  a  silver,  or  bimetallic  standard,  to  the  gold  standard 
is  often  a  difficult  and  expensive  national  undertaking,  but  it  brings 
the  advantages  of  a  more  stable  unit  of  value  and  of  increased 
facility  in  international  exchange.  In  October,  1906,  the  silver 
standard  prevailed  only  in  Bolivia,  four  of  the  countries  of  Central 
America,  China,  Persia,  and  the  Straits  Settlements.1 

Government  Paper  Money.  —  In  metallic  money  of  limited 
coinage,  there  is,  as  we  have  seen,  a  considerable  element  of  credit 
value  added  to  the  actual  bullion  value  of  the  coins.  In  paper 
money  the  element  of  credit  is  alone  present.  Government  paper 
money  is  composed  of  instruments  which  bind  the  government  to 
pay,  and  usually  to  pay  on  demand,  equivalent  amounts  of  metallic 
money,  —  usually  standard  money. 

Government  paper  money  also  differs  from  metallic  money  of 
limited  coinage  in  respect  to  the  motives  which  give  rise  to  and  regu- 
late its  issue.  Subsidiary  coins  are  issued  by  the  government  in 
response  to  the  demand  for  a  circulating  medium  for  use  in  small 
transactions  and  in  making  change.  The  public  convenience  is  the 
first  consideration;  the  profit  accruing  to  the  government  on  such 
coinage  is  a  secondary  thing.  In  issuing  government  paper  money, 
1  Report  of  the  Director  of  the  Mint,  in  Finance  Report,  1907,  p.  297. 


MONEY 


235 


however,  fiscal  motives  have  predominated.  When  hard  pressed 
to  swell  the  government  income  to  cover  an  increase  in  expenditures, 
those  responsible  for  the  financial  policies  of  a  government  have 
sometimes  deemed  it  advisable  for  the  government  to  make  use  of 
its  own  notes,  promises  to  pay,  in  discharging  its  obligations. 

These  differ  from  government  bonds,  which  are  often  issued  in 
similar  circumstances,  in  that  the  bonds  bear  interest,  are  sold  to 
voluntary  buyers,  and  are  usually  payable  at  a  definite  time  in  the 
future,  while  government  notes  are  usually  non-interest  bearing, 
represent  a  forced,  rather  than  a  voluntary  loan,  and  are  usually, 
in  form  at  least,  payable  on  demand,  or  in  practice,  at  an  indefinite 
time  in  the  future.  They  are,  moreover,  issued  in  convenient  form 
for  monetary  use,  and  are  usually  made  legal  tender,  so  that  they 
pass  from  hand  to  hand  as  a  medium  of  exchange.  The  forced 
loan  which  they  represent  is  therefore  shifted  from  those  who  first 
receive  the  notes  from  the  government  in  payment  for  goods  or 
services. 

Colonial  and  Revolutionary  Bills  of  Credit.  —  Paper  money 
issues  have  frequently  been  used  in  the  United  States  as  a  means  of 
meeting  a  fiscal  emergency,  especially  those  springing  from  the 
extraordinary  expenditures  occasioned  by  wars.  The  expense  of 
sending  troops  to  the  Indian  wars  was  one  of  the  things  that  led 
most  of  the  American  colonies  to  issue  paper  money.  The  history 
of  these  colonial  "bills  of  credit,"  as  they  were  called,  illustrate  two 
dangers  that  seem  to  be  inseparable  from  the  use  of  this  financial 
and  monetary  device.  In  the  first  place,  it  was  very  easy  to  suc- 
cumb to  the  temptation  of  paying  ordinary  as  well  as  extraordinary 
expenditures  in  this  easy  way.  Some  of  the  colonies  got  entirely 
out  of  the  habit  of  taxing  themselves  to  meet  current  public  ex- 
penses. The  refusal  to  levy  taxes  was  a  prolific  cause  of  disputes 
between  colonial  assemblies  and  royal  governors. 

In  the  second  place,  because  no  money  was  raised  for  the  pur- 
pose, these  bills  of  credit  were  not  redeemed  promptly.  Their 
value,  as  compared  with  metallic  money,  fell  because  people  lost 
confidence  in  their  redeemability.  As  the  currency  depreciated, 
it  took  continually  larger  issues  of  it  to  meet  the  government  ex- 
penditures, and  each  increase  in  the  amount  in  circulation  led  to  a 


236  OUTLINES    OF   ECONOMICS 

further  fall  in  value.  After  the  currency  had  become  practically 
worthless,  it  was  a  common  practice  of  the  colonies  to  repudiate  it 
in  whole  or  in  part,  and  to  start  afresh  with  bills  of  a  "  new  tenor." 
Any  attempt  to  restrict  this  reckless  use  of  public  credit  was  met 
with  determined  resistance  from  the  "cheap  money"  advocates  of 
that  day.  There  were  frequent  complaints  of  the  scarcity  of  money, 
especially  from  the  more  newly  settled  districts.  The  greater  the 
quantity  of  money  issued,  the  more  insistent  was  the  demand  for 
still  further  issues.  In  short,  this  colonial  experience  in  itself  gives 
sufficient  basis  for  the  inference  that  from  the  monetary  as  well  as 
the  fiscal  point  of  view,  the  use  of  paper  money  easily  degenerates 
into  a  bad  habit. 

Again,  in  the  Revolutionary  War,  paper  money  issues  were  made, 
—  this  time  by  the  Continental  Congress  as  well  as  by  the  individual 
colonies.  The  Continental  Congress  was  really  driven  to  this  action 
by  its  lack  of  the  power  of  levying  taxes.  Its  bills  became  practi- 
cally worthless,  although  every  effort  was  made  to  maintain  their 
parity  with  metallic  money  by  appeals  to  patriotic  sentiment. 
After  the  formation  of  the  national  government  a  few  of  them  were 
redeemed  at  one  cent  on  the  dollar. 

It  was  our  unfortunate  colonial  and  revolutionary  experience 
with  paper  money  which  led  to  the  insertion  of  the  wise  provision 
in  the  federal  Constitution  which  forbids  the  individual  states  to 
issue  bills  of  credit  or  to  make  anything  but  gold  and  silver  legal 
tender  in  payment  of  debts. 

The  Greenbacks.  —  The  federal  government  made  no  important 
issues  of  paper  money  until  the  Civil  War.1  It  was  not  generally 
foreseen  that  that  conflict  would  be  so  long  continued  and  intense 
as  it  was,  and  Congress  consequently  neglected  to  make  adequate 
provision  for  taxes  that  would  help  to  meet  the  increased  expendi- 
tures and  to  sustain  the  government  credit  in  the  borrowing  opera- 
tions that  were  necessary.  In  1861  the  secretary  of  the  treasury 
was  authorized  to  issue  at  his  discretion  $50,000,000  in  "demand 

'The  federal  government  issued  treasury  notes  in  the  war  of  1812  and  the 
Mexican  War,  and  during  the  panics  of  1837  and  1857.  Most  of  these  issues  were 
interest  bearing,  however ;  none  of  them  were  legal  tender,  and  none  of  them  got 
into  common  use  as  media  of  exchange. 


MONEY 


237 


notes,"  which,  although  they  were  not  legal  tender,  could  be  used 
in  all  payments  to  the  government.  These  were  redeemed  promptly 
on  demand  until  the  end  of  the  year,  when  the  withdrawal  of  gold 
from  the  banks  by  depositors  for  hoarding,  and  by  the  government 
for  its  own  uses,  led  first  the  banks  and  then  the  government  to 
suspend  specie  payments,  —  that  is,  to  refuse  to  pay  their  current 
obligations  in  gold. 

In  1 86 1,  moved  by  the  absolute  necessity  of  providing  some  kind 
of  money  for  the  federal  treasury,  Congress  authorized  the  issue  of 
$i  50,000,000  in  legal  tender  notes,1  or  greenbacks,  as  they  came  to 
be  called.  It  was  hoped,  moreover,  that  this  increase  in  the  circu- 
lating medium  would  improve  the  market  for  government  bonds 
for  which  the  greenbacks  were  at  first  made  convertible  at  par. 
This  action  was  not  taken  without  strenuous  opposition  on  the  part 
of  those  who  foresaw  some  of  the  disastrous  consequences  of  large 
paper  money  issues.  But  as  in  earlier  American  experience  with 
paper  money,  succeeding  issues  met  with  less  and  less  resistance. 
All  together,  greenbacks  to  the  amount  of  $450,000,000  were 
issued  during  the  war. 

It  was  the  general  expectation  when  the  greenbacks  were  issued 
that  they  would  be  retired  as  soon  as  possible  after  the  conclusion 
of  the  war.  But  when  such  action  became  possible,  it  was  opposed 
by  many  who  thought  that  the  reduction  of  the  circulating  medium 
would  decrease  prices,  impose  additional  burdens  upon  debtors, 
injure  business  interests,  reduce  the  public  revenues,  and  hamper 
the  government  in  the  refunding  of  its  public  debt.  In  1866,  how- 
ever, Congress  authorized  the  gradual  retirement  of  the  greenbacks, 
but  repealed  the  act  in  1868.  The  amount  in  circulation  in  1874 
was  $382,000,000,  and  in  that  year  a  bill  requiring  the  definite  in- 
crease of  the  issue  to  $400,000,000  was  prevented  from  becoming 
law  and  thus  establishing  a  dangerous  precedent  only  by  the  veto 
of  President  Grant.  Some  greenbacks  were  retired  under  the  pro- 
visions of  an  act  of  1875,  but  in  May,  1878,  there  were  $346,681,000 
outstanding,  and  as  a  law  then  enacted  provides  for  their  constant 
reissue  after  being  received  or  redeemed  at  the  treasury,  the  amount 
still  stands  at  that  figure.  The  part  that  they  played  in  the  financial 
1  Including  the  "demand  notes,"  which  were  now  made  legal  tender. 


238  OUTLINES   OF  ECONOMICS 

difficulties  of  1890-1893,  together  with  the  history  of  the  treasury 
of  the  notes  of  1890,  has  been  described  in  connection  with  the  dis- 
cussion of  bimetallism. 

At  present  the  greenbacks  constitute  a  useful  and  acceptable  part 
of  the  stock  of  money.  But  if  another  financial  crisis  should 
deplete  the  government  treasury,  they  would  very  likely  prove 
again  to  be  a  source  of  difficulty.  Their  retirement  is  feasible  under 
present  conditions,  but  would  be  most  difficult  to  accomplish  under 
the  very  financial  conditions  under  which  they  would  be  most  dan- 
gerous.. The  currency  act  of  1900  provides  for  a  gold  reserve  of 
$i  50,000,000,  to  be  held  against  them  to  insure  their  redeemability. 
Jf  the  reserve  falls  below  $100,000,000,  the  secretary  of  the  treasury 
is  directed  to  replenish  it  from  the  proceeds  of  bond  sales.  Al- 
though this  gold  reserve  also  constitutes  part  of  the  real  security 
behind  our  silver  dollars,  it  could  safely  be  diminished  in  amount 
if  the  greenbacks  were  retired. 

Economic  Effects  of  the  Greenbacks.  —  The  greenbacks  are  in 
form  promises  to  pay,  but  they  are  not  promises  to  pay  on  demand, 
nor  at  any  specific  time.  During  the  period  of  the  suspension  of 
specie  payments  they  were  not  actually  redeemable  in  gold,  nor 
was  gold  in  general  circulation  as  a  medium  of  exchange  except  on 
the  Pacific  coast.  Gold  was,  however,  in  addition  to  its  industrial 
uses,  employed  as  money  in  international  trade,  in  the  payment  of 
interest  on  government  bonds,  and  for  customs  duties  (for  which 
the  greenbacks  were  not  legally  receivable).  There  was  thus  a 
-constant  demand  for  gold  money,  which  was  met  by  its  sale  as  a 
commodity  in  the  New  York  market.  The  gold  market  was  highly 
speculative,  the  daily  and  even  the  hourly  fluctuations  in  the  price 
of  gold  in  greenbacks  being  considerable.  Notwithstanding  these 
speculative  features  the  prices  paid  for  gold  indicated  very  accu- 
rately, in  the  long  run,  how  much,  in  the  expert  judgment  of  market 
specialists,  the  value  of  the  greenbacks  had  depreciated. 

Everything  that  was  thought  to  affect  the  probability  of  the  ulti- 
mate redemption  of  the  greenbacks  in  gold  influenced  their  price. 
Among  these  factors  were  the  quantity  of  greenbacks  issued,  the 
condition  of  the  federal  treasury,  the  military  successes  and  re- 
verses of  the  Union  cause,  and,  in  later  years,  the  prospects  for  the 


MONEY  239 

resumption  of  specie  payments.  Greenbacks  reached  a  parity 
with  gold  two  weeks  before  the  resumption  of  specie  payments  on 
January  i,  1879.  A  fact  of  special  significance  is  that  until  July, 
1863,  the  greenbacks  were  convertible  at  par  into  6  per  cent  gold 
bonds.  These  bonds  formed  an  actual  standard  of  value  for  the 
greenbacks,  and  although  themselves  depreciated,  exercised  for 
the  time  being  a  steadying  influence  upon  their  value. 

As  the  common  medium  of  exchange  consisted  almost  entirely  of 
greenbacks  l  and  of  bank  notes  convertible  only  into  greenbacks, 
prices  were  measured  in  greenback  "dollars"  and  naturally  rose  as 
the  gold  value  of  the  greenback  depreciated.  Reference  to  the 
table  on  page  240  will  show  a  rough  correspondence  between 
changes  in  the  general  level  of  prices,  expressed  in  greenbacks,  and 
changes  in  the  value  of  gold,  measured  in  greenbacks.  But  the 
price  of  commodities  rose  relatively  higher  than  did  the  price  of 
gold,  and  declined  less  rapidly.2  Retail  prices,  in  turn,  declined 
less  rapidly  than  did  wholesale  prices.  Wages  advanced  more 
slowly  than  prices;  maximum  wages  were  not  paid  until  1872,— 
seven  years  after  retail  prices  and  eight  years  after  wholesale  prices 
had  reached  their  maximum. 

That  there  was  not  a  closer  correspondence  between  the  movement  in  gen- 
eral prices  and  the  changes  in  the  gold  value  of  the  greenback  was  due  to  two 
sets  of  influences:  (i)  Even  if  greenbacks  had  not  been  issued,  and  if  prices 
had  been  measured  in  gold,  there  would  have  been  marked  fluctuations  in 
prices,  —  not  only  such  as  continually  occur  in  normal  years,  but  also  those 
due  to  such  exceptional  things  as  the  withdrawal  of  a  large  number  of  men 
from  industry  and  agriculture  to  military  service,  the  shifting  of  productive 
effort  in  response  to  the  enormous  demand  for  military  supplies,  the  period 
of  extraordinary  business  activity,  of  railway  building,  and  of  agricultural 
and  industrial  expansion  that  followed  the  war,  the  reaction  and  financial 
crisis  in  1873,  and  the  return  of  prosperous  conditions  in  the  last  years  of  the 

1  Subsidiary  coins  did  not  go  out  of  circulation  until  1862,  when  the  value 
of  the  greenback  dropped  below  the  value  of  the  bullion  in  these  coins.  Postage 
stamps  and  notes  and  tokens  issued  by  cities  and  by  business  firms  were  for  a 
while  used  as  small  change.  In  1863  the  situation  was  helped  by  the  issue 
of  fractional  paper  currency  in  denominations  as  low  as  three  cents. 

*  The  more  detailed  figures,  of  which  the  table  given  here  is  only  a  summary, 
show  that  the  prices  of  commodities  also  advanced  more  slowly  than  did  the  price 
of  gold.  For  an  illuminating  discussion  of  these  price  changes  see  MitchelL 
Gold,  Prices,  and  Wages  under  the  Greenback  Standard,  Chap.  V. 


240 


OUTLINES   OF   ECONOMICS 


TABLE    I 
PRICES  AND  WAGES  IN  THE  GREENBACK  PERIOD  1 


YEAR 

AVERAGE 
ANNUAL  PRICE 
OF  GOLD  IN 
GREENBACKS 

JULY 
WHOLESALE 
PRICES  ' 

AVERAGE  ANNUAL  PRICES  * 

AVERAGE 
WAGES  « 

Wholesale 

Retail 

1860 

100 

IOO 

IOO 

IOO 

1861 

95 

94 

107 

99 

1862 

"3-3 

1  20 

109 

*3r 

104 

1863 

I45-2 

155 

148 

1  68 

119 

1864 

203.3 

236 

225 

215 

142 

1865 

157-3 

183 

224 

219 

155 

1866 

140.9 

191 

203 

208 

164 

1867 

138.2 

170 

J77 

'93 

167 

1868 

139-7 

165 

180 

190 

170 

1869 

133-0 

158 

172 

177 

179 

1870 

114.9 

145 

156 

1  66 

179 

1871 

111.7 

137 

144 

»5S 

184 

1872 

112.4 

139 

138 

151 

185 

1873 

113.8 

140 

M3 

148 

183 

1874 

III.  2 

138 

144 

M5 

175 

1875 

114.9 

129 

134 

140 

163 

1876 

III.5 

118 

1  20 

135 

153 

1877 

104.8 

114 

117 

!34 

M3 

1878 

100.8 

99 

99 

127 

142 

1879 

IOO.O 

98 

93 

123 

139 

1  Compiled  from  Gold,  Prices,  and  Wages  under  the  Greenback  Standard,  by  Wesley  C. 
Mitchell.  The  figures  in  the  price  column  are  "  index  numbers,"  that  is,  they  are  obtained 
by  counting  the  price  of  each  commodity  in  each  year  as  a  percentage  of  its  price  in  1860,  and 
then  averaging  the  various  relative  prices  thus  obtained  for  each  year.  The  figures  in  the 
wage  column  are  computed  in  a  similar  way.  In  the  "  price  of  gold  "  column  parity  between 
greenbacks  and  gold  is  represented  by  100. 

•  92  commodities.  331  commodities.  *  For  78  establishments. 

greenback  period.1  (2)  The  depreciation  in  the  value  of  the  greenback  in 
gold  was  measured  quickly  and  accurately  in  the  gold  market,  but  the  move- 
ment of  prices  was  hampered  by  habit,  custom,  existing  contracts,  local 
influences,  etc.  We  have  seen  in  the  discussion  of  value  that  retail  prices 
are  less  sensitive  to  changing  market  conditions  than  are  wholesale  prices. 

1  This  statement  is  subject  to  the  limitation  implied  in  the  fact  that  general 
commercial  conditions  were  themselves  caused  in  part  by  the  influence  of  the 
cheap  and  fluctuating  medium  of  exchange. 


MONEY 


24I 


Wages,  in  turn,  are  usually  less  mobile  than  retail  prices.  All  these  things 
interacted.  Wages,  to  give  only  one  example,  constitute  an  important  part 
of  the  expenses  of  producing  commodities,  and  the  sluggish  movement  of 
wages  kept  the  expenses  of  production  from  advancing,  and,  later,  from 
falling  as  rapidly  as  would  otherwise  have  been  the  case,  and  must  have  had 
a^corresponding  effect  on  the  prices  charged  for  commodities. 

Aside  from  these  general  changes,  the  minor  fluctuations,  the  short- 
time  variations  in  prices,  were  unusually  wide  and  numerous,  — 
a  fact  which  may  be  attributed  to  the  uncertain  value  of  the  medium 
of  exchange.  Such  fluctuations  were  apt  to  upset  all  business  cal- 
culations; chance  became  more  important  and  foresight  less  im- 
portant as  a  factor  in  profits.  Under  such  conditions  an  intense 
and  reckless  spirit  of  speculation  was  bred,  with  unfortunate 
effects  on  business  morality  as  well  as  on  economic  conditions. 

As  a  fiscal  expedient,  the  greenbacks  led  to  results  as  disastrous 
as  those  which  attended  their  use  as  money.  The  government  was 
forced  to  sell  bonds  for  depreciated  greenbacks,  but  in  order  to 
maintain  its  credit  it  had  to  pay  the  interest  and  ultimately  the  prin- 
cipal of  these  bonds  in  gold.  Supplies  for  the  army  were  paid  for 
in  depreciated  greenbacks,  but  these  greenbacks  had  to  be  ulti- 
mately redeemed  in  gold.  It  has  been  estimated  that  the  use  of 
the  greenbacks  increased  the  cost  of  the  Civil  War  by  nearly 
$600,000,000. 

Fiat  Money.  —  After  1873  the  advocates  of  cheap  money  were 
not  content  with  merely  opposing  any  reduction  in  the  quantity 
of  the  greenbacks.  They  went  so  far  as  to  urge  that  the  amount  of 
paper  money  should  be  greatly  increased,  and  that  the  use  of 
metallic  money  should  be  definitely  and  permanently  abandoned. 
Bank  notes  were  also  attacked  because  they  were  issued  by  "privi- 
leged corporations."  The  question  came  to  be  an  important  politi- 
cal issue,  and  in  1876  it  brought  about  the  organization  of  the 
Greenback  party,  which  figured  in  three  presidential  campaigns, 
and  which  polled  more  than  a  million  votes  in  the  congressional 
elections  of  1878.  In  more  recent  years  similar  demands  were 
voiced  by  the  Populist  party. 

The  theory  of  money  which  formed  the  basis  of  the  contention 
of  the  members  of  the  Greenback  party  is  sometimes  called  the 
"fiat  money"  theory.  Those  who  held  this  theory  of  money  saw 


242  OUTLINES   OF   ECONOMICS 

no  significance  in  the  fact  that  the  greenbacks  were  in  form  prom- 
ises to  pay  and  that  they  were  generally  regarded  as  only  tem- 
porarily irredeemable.  In  their  view  they  were  simply  "dollars," 
made  such  by  the  expressed  will  of  the  government.  Nor  did  they 
see  any  significance  in  the  fact  that  during  the  seventeen  years  of 
the  suspension  of  specie  payments  over  $500,000,000  in  United 
States  gold  coins  issued  from  the  mints.  As  a  matter  of  fact  the 
fiat  money  advocates  were  misled  by  what  some  logicians  have 
called  the  "jingle  fallacy."  That  the  "dollar"  of  the  ordinary 
medium  of  exchange  and  the  "dollar"  as  a  standard  unit  of 
value  were  different  things  did  not  occur  to  them. 

If  they  had  succeeded  in  eliminating  the  credit  element  in  the 
value  of  the  paper  currency  by  ceasing  to  print  "promises  to  pay" 
(as  they  actually  proposed  to  do),  and  had  instituted  a  new  name 
for  the  money  unit,  —  possibly  (to  reverse  the  spelling)  "rallod," 
—  they  would  surely  have  encountered  difficulty  in  getting  people 
to  accept  pieces  of  printed  paper,  informing  them  that  "  This  is  a 
rallod,"  as  money.  It  is  hard  to  see  how  "the  supply  of  money  as 
compared  with  the  demand  for  it,"  on  which  the  fiat  money  advo- 
cates counted  to  fix  the  value  of  their  money  units,  would  have 
helped  matters  very  much.  Nor  would  the  convertibility  of  fiat 
money  into  interest-bearing  bonds,  which  was  suggested  by  some, 
have  given  us  a  standard  of  value.  For  the  bonds  would  have 
been  simple  promises  to  pay  a  certain  sum  in  fiat  money  units,  with 
interest  at  a  certain  rate,  also  in  fiat  money  units.  The  difficulties 
that  would  have  been  encountered  in  international  trade  would 
alone  have  sufficed  to  make  fiat  money  impossible. 

Some  writers  have  referred  to  the  greenbacks  as  the  "standard 
of  value"  during  the  suspension  of  specie  payments.  As  a  matter 
of  fact  gold,  under  the  operations  of  unlimited  coinage,  was  the  ulti- 
mate standard,  and  the  standard  dollar  was  the  gold  dollar.  The 
value  of  the  greenback  dollar,  in  which  prices  were  measured,  was 
the  value  of  the  gold  dollar,  discounted  according  to  the  outlook  for 
the  ultimate  redemption  of  the  greenbacks  in  gold.  The  green- 
backs were  at  most  only  a  "secondary  standard"  of  value. 

(For  Questions  and  References,  see  the  following  chapter.) 


CHAPTER  XV 
CREDIT  AND  BANKING 

Credit  Transactions.  —  Thus  far,  in  our  discussion  of  money,  we 
have  failed  to  take  account  of  the  fact  that  the  greater  part  of  ex- 
changes are  credit  transactions,  which  do  not  directly  or  immedi- 
ately involve  the  use  of  money  (in  the  sense  of  generally  acceptable 
money  instruments).  A  credit  transaction  is  a  transfer  of  goods, 
services,  or  money,  for  a  future  equivalent.  In  a  "cash"  transac- 
tion there  are  only  two  elements,  —  the  goods  sold  and  the  money 
paid  for  them.  But  in  a  credit  transaction  a  third  element  —  time 
—  is  added.  The  introduction  of  this  third  element  leads  to  ex- 
ceedingly important  results.  In  the  first  place  it  makes  possible  an 
enormous  number  of  exchanges  in  which  the  buyer  is  either  unable 
or  disinclined  to  render  a  present  equivalent.  In  the  second  place 
it  obviates,  to  a  very  large  extent,  the  necessity  of  using  money. 

Suppose,  for  example,  that  A  and  B  are  the  only  inhabitants  of 
an  isolated  community.  Three  ways  of  making  exchanges  are 
open  to  them.  They  can  use  a  system  of  direct  exchange  or 
barter,  which  will  prevent  A  from  getting  goods  from  B  unless  he 
has  some  equivalent  which  he  is  willing  to  give  up  and  which  B 
is  willing  to  accept.  Or,  they  may  use  one  commodity  as  money, 
in  which  case  the  purchasing  power  of  either  A  or  B  at  any  given 
time  will  be  governed  by  the  amount  of  that  particular  commodity 
that  he  possesses,  rather  than  by  the  total  amount  of  all  his  posses- 
sions. But  by  combining  a  system  of  credit  with  their  use  of 
money,  they  will  be  able  to  make  transfers  freely,  for  in  an  occa- 
sional balancing  of  accounts  most  of  the  payments  due  each  other 
will  cancel,  leaving  only  a  relatively  small  amount  to  be  paid  in 
money. 

Something  very  much  like  this  third  process  is  continually  going 
on  in  contemporary  economic  life.  The  process  is  more  complex, 

243 


244  OUTLINES   OF  ECONOMICS 

however,  because  A  actually  sells  things  to  one  person  or  group  of 
persons,  and  buys  them  from  other  persons.  And  it  is  very  likely 
that  these  two  groups,  the  sellers  and  the  buyers  in  A's  transactions, 
have  no  direct  business  transactions  with  each  other  in  which  their 
respective  claims  against  A  and  debts  to  A  can  be  canceled.  If, 
however,  we  take  all  buyers  and  all  sellers  into  account,  and  if  we 
could  push  our  analysis  of  the  complex  network  of  credit  relations 
far  enough,  we  would  find  points  of  contact  between  A's  credits 
and  his  debts.  That  is,  if  A  gives  a  promissory  note  in  exchange 
for  a  purchased  good,  this  promissory  note  might  be  passed  on 
from  hand  to  hand  until  it  got  into  the  possession  of  some  one  who 
is  indebted  to  A,  —  if  the  path  it  should  take  were  known.  The 
difficulty  is  that  the  path  is  not  known.  The  institution  of  banking, 
however,  provides  clearing  centers,  where  credits  and  debts  are 
balanced  against  each  other  and  canceled. 

A,  for  example,  has  a  "deposit"  in  a  local  bank,  which  means 
that  he  has  the  right  to  demand  payments  from  it  at  any  time  up  to 
the  amount  of  his  deposit.  He  usually  makes  a  payment  to  B, 
not  by  a  promissory  note,  but  by  a  check,  —  an  instrument  order- 
ing the  bank  to  pay  B  the  specified  amount.  This  check  will  be 
presented  for  payment  by  B  at  a  bank  where  he  has  a  deposit,  but 
the  "payment"  will  usually  be  made  by  adding  the  amount  of  the 
check  to  B's  deposit.  If  it  is  the  bank  where  A  also  has  his  deposit, 
the  transaction  is  settled  by  the  simple  process  of  debiting  A's  de- 
posit and  crediting  B's.  If  it  is  another  bank  in  the  same  town, 
and  if  the  town  is  a  small  one,  the  check  will  enter  into  the  daily 
exchange  by  the  two  banks  of  such  claims  against  each  other,  the 
daily  balance  in  favor  of  either  bank  being  usually  settled  in  money. 

In  the  larger  cities  a  further  economy  in  the  use  of  money  is 
achieved  by  means  of  the  clearing  house,  to  which  a  representative 
of  each  bank  brings  daily  all  of  the  checks  drawn  against  other 
local  banks  which  it  has  received  since  the  last  "clearing."  At 
the  clearing  house  the  checks  are  turned  over  to  the  representatives 
of  the  banks  against  which  they  are  drawn,  but  the  balances  are  not 
settled  between  the  individual  banks.  Instead,  a  balance  is  struck 
between  the  total  sum  of  each  bank's  claims  against  other  banks 
and  the  total  claims  of  other  banks  against  it.  Each  bank  then 


CREDIT   AND    BANKING 


245 


pays  to  the  clearing  house,  usually  in  money,  or  receives  from  it, 
as  the  case  may  be,  the  amount  of  balance  due  to  it  or  from  it. 
This  system  achieves  a  great  economy  of  both  time  and  money.1 

If  the  banks  in  which  A  and  B  keep  their  deposits  are  in  different 
towns,  A's  check  will  probably  be  sent  by  B's  bank  to  a  bank  in  a 
neighboring  large  city,  in  which  B's  bank  has  its  own  deposit  ac- 
count. If  A's  bank  is  also  in  the  territory  tributary  to  this  same 
city,  the  check  may  be  sent  by  the  city  bank  directly  to  A's  bank 
for  collection,  or  to  its  own  correspondent  bank  in  the  same  town. 
If  A's  bank  is  in  another  part  of  the  country,  the  check  will  be  sent 
to  a  bank  located  in  a  large  city  in  that  region,  which  will  attend 
to  its  collection.2  Thus  a  check  drawn  on  a  local  bank  in  California, 
deposited  in  a  local  bank  in  Illinois,  will  very  likely  be  collected  via 
Chicago  and  San  Francisco.  The  balances  of  credits  and  debits 
which  are  thus  created  between  city  and  country  banks  are  settled 
to  a  very  large  extent  by  means  of  crediting  and  debiting  deposit 
accounts  in  city  banks,  thus  obviating  by  that  much  the  necessity 
for  frequent  shipments  of  money.  In  general,  we  have  in  the 
United  States  a  continuous  balancing  and  cancellation  of  debts  and 
credits,  first,  in  each  locality;  second,  between  each  important  city 
and  its  tributary  territory,  and,  third,  between  the  different  impor- 
tant cities.  Much  the  same  process  is  characteristic  of  international 
exchange,  but  that  is  a  topic  which  will  be  treated  in  another 
chapter. 

1  Over  $95,300,000,000  in  checks  and  drafts  passed  through  the  New  York 
Clearing  House  in  the  year  ending  September   i,  1907.     The  money  balances 
paid  amounted  to  $3,800,000,000,  or  only  4  per  cent  of  the  total  clearings.     The 
average  cash  payments  required  during  the  last  fifty-four  years  have  amounted 
to  4.64  per  cent  of  the  clearings.     In  times  of  financial  stringency  clearing  houses 
sometimes  allow  the  payment  of  balances  in  "clearing  house  certificates,"  issued 
to  individual  banks  upon  the  basis  of  approved  securities  deposited  with  the 
clearing  house.     In  some  cases  the  banks  have  temporarily  put  such  certificates 
into  general  circulation  as  an  emergency  currency. 

2  The  London  Clearing  House  clears  for  all  England  in  a  very  simple  and 
efficient  way.     A  country  bank  sends  its  daily  receipts  of  checks  on  banks  in  other 
towns  to  the  London  bank  in  which  it  keeps  a  deposit.     In  a  daily  "country  clear- 
ing" these  checks  are  distributed  to  the  London  banks  with  which  the  banks  on 
which  the  checks  are  drawn  keep  accounts.     The  mere  territorial  extent  of  the 
United  States  makes  such  a  scheme  unworkable  here.     Various  proposals  have 
been  made,  however,  for  central  clearing  houses  that  will  make  clearances  for 
limited  districts. 


246  OUTLINES    OF   ECONOMICS 

Personal  Credit.  —  If  a  man  does  not  hoard  money  on  the  one 
hand,  or  fail  to  pay  his  debts  on  the  other  hand,  his  expenditures 
(including  investments)  are  bound  to  be,  in  the  long  run,  approxi- 
mately equal  to  his  income.  But  for  a  business  man  a  continuous 
equality  of  income  and  expenditure  is  impossible.  At  some  times 
his  deposit  account  will  be  built  up  more  rapidly  than  he  checks  it 
out;  at  other  times  his  need  for  means  of  making  payments  will 
outrun  his  receipts.  If,  for  example,  he  is  a  contractor,  whose  ex- 
penses of  production  are  fairly  constant,  but  whose  product  is  paid 
for  only  when  completed,  or  a  merchant,  who  replenishes  his  stock 
of  goods  twice  a  year  but  whose  sales  are  distributed  throughout 
the  year,  or  a  farmer  who  must  pay  his  harvest  expenses  before  he 
sells  his  crops,  he  may  find  it  necessary  to  utilize  his  credit.  Now, 
his  personal  credit,  his  power  of  purchasing  things  without  immedi- 
ate payment,  will  depend  to  some  extent  on  his  personal  ability  and 
integrity.  But,  nevertheless,  the  fundamental  measure  of  his 
credit"  will  be  the  amount  of  his  realizable  wealth.  This,  however, 
is  apt  to  consist  largely  of  property  that  is  not  "for  sale,"  —  his 
stock  of  consumption  goods  and  his  income  yielding  land  or 
capital. 

These  things  do  not  have  to  be  sold  in  order  to  convert  them  into 
means  of  payment.  To  meet  a  temporary  need  they  may  be  made 
the  basis  of  credit,  through  the  process  of  hypothecation,  a  name 
which  means  the  conditional  transfer  of  property  rights.  The 
hypothecation  may  be  definite  and  formal,  as  when  a  mortgage  is 
given  on  specific  items  of  property  or  when  valuable  credit  instru- 
ments of  various  sorts  (such  as  government  or  corporation  bonds, 
bills  of  lading,  warehouse  receipts,  etc.)  are  put  into  the  actual  pos- 
session of  the  creditor  as  "collateral  security  " ;  or  it  may  be  simply 
implied,  as  in  the  case  of  an  "unsecured"  personal  note,  for  practi- 
cally all  of  the  property  of  a  borrower,  over  and  above  the  items 
specifically  hypothecated  for  certain  debts  is,  in  legal  fact,  hypothe- 
cated for  his  remaining  debts.  It  is  important  to  note,  too,  that 
future  values,  rather  than  present  values,  constitute  the  basis  of 
present  credit.  The  lender's  interest  is  in  the  question  of  the  ade- 
quacy of  the  value  of  the  security  at  the  time  when  payment  be- 
comes due.  Present  values  being  equal,  a  borrower  can  secure  a 


CREDIT    A.\:>    BAXKIXO 


247 


larger  amount  of  credit  when  market  conditions  are  improving 
than  when  they  are  declining. 

A  man's  probable  future  income  and  the  probable  future  value 
of  his  property,  then,  constitute  the  real  measure  and  foundation 
of  his  individual  credit.  His  individual  credit,  however,  is  of  very 
little  use  to  him  as  a  means  of  payment.  Some  difficulties  in  the 
way  of  using  individual  notes  as  media  of  exchange  have  already 
been  suggested.1  There  is  another  difficulty  in  the  fact  that  his 
personal  notes  will  not  be  willingly  accepted  by  others  in  lieu  of 
money  payments  unless  they  know  him,  the  value  of  his  property 
and  the  extent  to  which  it  is  already  hypothecated.  Moreover, 
these  same  difficulties  stand  in  the  way  of  such  notes  being  passed 
from  hand  to  hand  through  successive  indorsements. 

Bank  Credit.  —  In  order  to  make  it  readily  available  as  a  medium 
of  exchange,  personal  credit  has  to  be  transformed  into  bank  credit. 
Instead  of  using  his  own  note  as  a  medium  of  exchange,  a  business 
man  will  normally  have  it  "discounted"  by  his  banker.  If  the 
note  is  for  sixty  days,  for  example,  the  business  man  yields  the  right 
to  demand  a  specific  amount  of  money  from  him  in  sixty  days,  in 
exchange  for  a  deposit  credit,  —  the  right  to  receive  on  demand  the 
same  amount  of  money  less  the  discount.2  The  business  man  adds 
the  note  to  his  liabilities  and  a  deposit  to  his  assets.  The  bank  adds 
the  note  to  its  assets  and  the  deposit  to  its  liabilities. 

Having  converted  his  personal  credit  into  a  bank  deposit,  the 
business  man  can  now  use  it  as  a  means  of  payment  through  the 
checking  system  that  has  been  described.  Ordinary  commercial 
banking  consists,  in  large  part,  of  this  purchase  of  personal  credit 

1  It  is  true,  of  course,  that  business  men  often  accept  their  customers'  notes  in 
payment  of  accounts,  or  as  an  equivalent  for  goods  purchased.     These  notes, 
however,  do  not  usually  pass  any  farther  as  a  medium  of  exchange,  but  are  in- 
dorsed by  the  business  man  and  presented  to  a  bank  for  discount.     Such  notes, 
usually  known  as  "trade  paper,"  constitute  a  large  part  of  the  securities  of  many 
commercial  banks. 

2  Discount  is  simply  one  form   of  interest.     Banker's  discount  differs  from 
ordinary  interest  in  that  it  is  computed  as  a  certain  per  cent  of  the  total  amount 
that  is  repaid,  while  ordinary  interest  is  computed  as  a  per  cent  of  the  amount  that 
is  loaned.     Discount  is  deducted  from  the  principal  of  the  loan  in  advance;    in- 
terest is  paid  at  the  maturity  of  the  loan  or  (on  long  time  loans)  at  stated  intervals. 
On  demand  or  "call"  loans  and  on  time  loans  on  collateral  security  "interest" 
rather  than  "discount"  is  charged. 


248  OUTLINES   OF   ECONOMICS 

and  sale  of  banking  credit.  The  bank  builds  up  assets  in  the  form 
of  loans  and  discounts  at  the  same  time  that  it  builds  up  its  obliga- 
tions in  the  form  of  deposits. 

The  security  behind  the  deposits  in  any  bank  consists  of :  (i)  loans 
and  discounts,  which  in  turn  rest  back  upon  personal  credit  or  upon 
specifically  hypothecated  property  (as  in  the  case  of  loans  on  col- 
lateral security);  (2)  bonds,  mortgages,  and  other  securities  owned 
by  the  bank,  which,  if  necessary,  may  be  sold  for  the  benefit  of  the 
depositors,  unless  specifically  pledged  as  security  for  bank  note 
issues;  (3)  the  bank's  own  deposits  in  other  banks,  together 
with  the  checks  or  similar  claims  against  other  banks  that  are  in 
its  possession;  (4)  its  other  property  (building,  fixtures,  etc.); 
(5)  (in  national  banks  and  some  state  banks)  the  personal  liability 
of  the  bank's  stockholders; 1  (6)  its  stock  of  money. 

But  that  these  assets  should  suffice  to  cover  the  deposit  liabilities 
of  a  bank  is  not  in  itself  sufficient  to  maintain  its  solvency.  Much 
depends  upon  the  character  of  the  assets,  —  the  amount  of  money 
included  in  them,  and  the  ease  and  quickness  with  which  other 
parts  of  the  assets  can  be  converted  into  money.  Each  deposit 
account  is  an  obligation  of  the  bank  to  pay  in  actual  money  if  it  is 
demanded.  The  depositor  cannot  use  checks  for  all  kinds  of  pay- 
ments, but  will  often  have  to  draw  on  his  deposit  account  for 
money.  Even  when  payments  are  made  by  checks,  those  who  re- 
ceive them  will  often  prefer  to  cash  them  rather  than  to  deposit 
them.  Moreover,  the  process  of  the  cancelation  of  credit  obliga- 
tions is,  as  we  have  seen,  not  altogether  perfect.  Balances  arise 
between  individual  banks  in  the  same  city,  between  city  and 
country,  and  between  different  cities  that  very  often  have  to  be 
settled  in  money. 

A  bank  accordingly  has  to  keep  enough  actual  cash  on  hand  to 
enable  it  to  meet  any  demands  that  may  be  made  upon  it  for  money. 

1  Even  in  case  some  of  the  bank's  loans  or  securities  prove  worthless  there 
is  a  margin  of  safety  for  the  depositors  in  the  fact  that  some  of  the  assets  of  the 
bank  represent  the  original  investments  of  the  bank's  stockholders  ("capital") 
or  profits  which  they  have  put  back  into  the  business  ("surplus"),  and  on  such 
assets  the  depositors  have  the  first  claim.  Moreover,  in  national  banks  and  some 
state  banks  the  stockholders  are  personally  liable  up  to  an  amount  equal  to  the 
par  value  of  their  holdings. 


CREDIT   AND    BANKING 


249 


As  deposits  constitute  the  most  important  cash  obligations  of  a 
bank,  the  size  of  this  money  reserve,  as  it  is  called,  is  normally  fixed 
for  safety's  sake  at  a  certain  per  cent  of  the  amount  of  the  deposits. 
This  proportion  varies  according  to  the  location  of  a  bank  and  the 
nature  of  its  business.  In  practice  it  varies  in  different  commercial 
banks  from  as  low  as  5  per  cent  to  as  high  as  35  per  cent  of  the 
deposits. 

If  its  reserve  increases,  a  bank  is  at  liberty  to  increase  its  deposits 
by  extending  its  loans  and  discounts,  attracting  these,  possibly,  by 
lowering  the  discount  rate.  If  the  reserve  is  decreasing,  the  bank 
must,  for  safety,  contract  its  deposits  by  restricting  its  loans  and 
discounts,  or  by  taking  measures  (such  as  the  sale  of  securities  for 
money)  that  will  replenish  the  reserve.1  In  order  that  the  ratio  of 
reserve  to  deposits  may  be  maintained  near  the  point  where  the 
right  balance  is  struck  between  profitableness  on  the  one  hand  and 
safety  on  the  other  hand,  it  is  necessary  that  the  bank's  assets  should 
be  as  fluid  as  possible.  This  is  best  accomplished  by  confining 
most  of  the  loans  or  discounts  to  notes  or  bills  of  exchange  that  are 
payable  in  thirty,  sixty,  or  ninety  days,  or,  at  most,  in  four  or  six 
months,  so  that  a  constant  flow  of  maturing  obligations  makes  it 
possible  for  a  bank  to  expand  or  contract  its  loans  and  discounts, 
and  hence  its  deposits,  as  seems  most  advisable. 

There  is  in  the  larger  cities  of  the  United  States,  especially  in 
New  York,  a  growing  use  of  bank  loans  payable  on  demand.  This 
enables  the  banks  to  keep  their  outstanding  loans  much  closer  to  the 
maximum  allowed  by  the  state  of  their  reserves  than  would  other- 
wise be  the  case,  but  the  practice  has,  as  we  shall  see  presently, 
other  effects  that  are  not  so  desirable. 

By  the  "money  market"  is  usually  meant  the  market  for  ex- 
changeable purchasing  power  in  the  form  of  loanable  funds ;  that  is, 
in  reality,  the  bank  credit  market.  The  amount  of  bank  credit 
available,  the  freedom  with  which  banks  will  make  loans  on  certain 

1  Some  banks  maintain  a  "bond  reserve"  of  high  grade  securities  that  may  be 
sold  to  enable  the  bank  to  meet  an  extraordinary  demand  for  money  or  to  enable 
it  to  extend  its  loans  and  discounts  when  necessary.  Such  investments  are 
normally  made  by  commercial  banks  when  the  demand  for  loans  does  not  absorb 
the  funds  at  the  bank's  disposal,  that  is,  when  money  reserves  are  unprofitably 
large. 


250  OUTLINES   OF   ECONOMICS 

kinds  of  securities,  and  the  interest  and  discount  rates  charged  for 
bank  credit  are  among  the  things  that  make  up  what  is  called  "the 
state  of  the  money  market."  But  it  should  be  clear  to  the  reader 
that  the  state  of  the  money  market  depends,  primarily,  on  two  things: 
first,  the  amount  and  nature  of  the  personal  credit  that  can  be  converted 
into  bank  credit,  and  second,  the  amount  of  money  in  the  bank  reserves. 

Bank  Notes.  —  There  is  one  way,  however,  in  which  banks  can 
meet  some  of  the  demand  for  money  without  drawing  on  their  re- 
serves and  thus  reducing  their  power  of  extending  credit.  This  is 
by  the  issue  of  bank  notes,  which  are  simply  the  promises  of  banks 
to  pay  money  on  demand,  issued  in  convenient  and  familiar  form 
for  use  as  paper  money.  These  notes  are  paid  as  money  to  cus- 
tomers of  a  bank  who  want  the  proceeds  of  their  borrowings  in  cash, 
and  to  depositors  and  to  holders  of  checks  who  prefer  money  to 
deposit  credit.  Bank  notes  pass  readily  from  hand  to  hand  as 
money,  and  at  the  present  time  constitute  an  important  part  of  the 
circulating  medium  in  most  countries. 

Bank  notes  are  like  deposits  in  that  both  are  demand  liabilities 
of  banks.  Bank  notes,  however,  circulate  among  persons  who  have 
no  means  of  informing  themselves  as  to  the  solvency  of  the  banks 
issuing  them.  The  holders  of  bank  notes  are  accordingly  usually 
given  special  protection  by  laws  which  regulate  the  conditions  of 
their  issue  and  redemption. 

State  Banks  of  Issue.  —  Before  the  Civil  War  the  actual  circu- 
lating medium  of  the  United  States  consisted  in  very  large  part  of 
notes  issued  by  banks  operating  under  state  laws.  The  notes 
issued  by  some  of  these  banks  were  as  "good  as  gold"  because  the 
banks  redeemed  them  promptly  in  gold,  —  a  fact  which  was  due  in 
some  cases  to  wise  and  rigid  state  regulation  of  banking,  and  in 
other  cases,  fewer  in  number,  to  conservative  use  of  the  too  exten- 
sive privileges  granted  by  lax  state  laws.  But  the  notes  of  other 
banks  were  depreciated  and  in  many  cases  were  absolutely  worth- 
less. 

Public  ignorance  of  the  real  nature  of  banking  gave  rise  to  the 
supposition  that  wealth  could  be  mysteriously  manufactured  by 
means  of  a  bank  charter  and  a  printing  press  (the  fiat  money  theory 
applied  to  bank  notes).  This  and  the  ever  recurring  demand  for 


CREDIT   AND    BANKING  25! 

cheap  money  were  responsible  for  the  situation.  Prohibited  by  the 
Constitution  from  issuing  their  own  bills  of  credit,  many  of  the  states, 
especially  in  the  South  and  West,  responded  to  the  clamor  for  cheap 
money  by  making  it  possible  for  their  citizens  to  organize  "banks" 
and  issue  their  own  bills  of  credit,  imposing  few  or  no  requirements 
as  to  the  actual  investment  of  capital,  the  accumulation  of  assets, 
or  the  restriction  of  note  issue.1  In  the  panics  of  1814,  1837,  and 
1857  but  few  banks  maintained  specie  payments.  Even  so  late  as 
1860,  although  the  hard  lessons  of  experience  had  brought  some 
improvements,  especially  in  the  older  states,  the  bank  note  circula- 
tion was  of  decidedly  varying  quality.  "Bank  note  reporters" 
and  "counterfeit  detectors"  had  to  be  issued  periodically  in  order 
to  give  to  business  men  the  latest  quotations  and  information  relat- 
ing to  the  depreciated  currency  they  had  to  receive  in  the  ordinary 
course  of  business.  After  1861  the"  suspension  of  specie  payments 
led  to  a  general  depreciation  of  bank  notes  as  compared  with  gold 
because  most  of  them  were  thereafter  redeemable  only  in  green- 
backs. 

The  National  Banking  System.  —  The  successful  state  banking 
system  of  New  York  was  the  model  after  which  Congress,  following 
the  recommendations  of  Secretary  Chase,  patterned  the  national 
banking  system  which  it  established  in  1863.  The  primary, 
although  not  the  only,  motive  that  led  to  this  action  was  the  desire 
to  provide  an  artificial  market  for  government  bonds,  which  at  the 
time  were  a  drug  on  the  market.  National  banks  were  required  to 
use  government  bonds  as  the  assets  behind  note  issues,  and  further- 
more, the  national  banks  were,  in  1866,  given  a  monopoly  of  the 
note  issue  privilege  by  the  imposition  of  a  prohibitive  tax  of  10 
per  cent  per  annum  upon  the  note  issues  of  state  banks. 

The  details  of  the  national  banking  law  have  been  amended  from 
time  to  time,  but  the  general  principles  of  the  regulation  of  the  note 
issue  remained  unchanged  until  Congress  passed  the  Aldrich  act  in 
1908.  As  the  law  has  stood  since  1900,  national  banks  may  not  be 
organized  unless  the  stockholders  contribute  a  minimum  capital, 

1  Some  states  circumvented  the  constitutional  prohibition  mentioned  by  es- 
tablishing their  own  banks  for  the  manufacture  of  paper  money.  The  Bank  of 
Kentucky  was  the  most  famous  of  these. 


252  OUTLINES   OF   ECONOMICS 

varying  from  $25,000  for  places  of  less  than  3000  population  to 
$200,000  for  places  of  more  than  50,000  population.  Three  limita- 
tions are  put  on  the  ordinary  issue  of  circulating  notes:  (i)  They 
must  not  exceed  in  amount  the  capital  stock  of  the  bank.  (2)  United 
States  government  bonds  have  to  be  purchased  by  the  bank  in 
amount  sufficient  to  equal,  dollar  for  dollar,  the  quantity  of  the 
notes  issued,  and  these  bonds  have  to  be  deposited  with  the  treas- 
urer of  the  United  States  as  security  for  the  redemption  of  the  notes. 
(3)  Each  bank  must  maintain  in  the  United  States  treasury  a  re- 
demption fund  in  "lawful  money"  equal  to  5  per  cent  of  its  note 
issue.  As  this  last  requirement  indicates,  bank  notes  are  redeem- 
able at  the  federal  treasury.  They  may  also  be  used  in  all  pay- 
ments to  the  government  except  customs  duties,  although  they  are 
not  legal  tender. 

The  Reserve  System.  —  While  the  note  holder  is  thus  protected 
by  a  special  kind  of  security  set  aside  for  the  purpose,  the  depositor 
in  a  national  bank  is  protected  only  by  its  general  assets.  These, 
however,  are  regulated  to  some  extent  by  the  federal  government. 
There  are  restrictions,  for  example,  intended  to  prevent  the  bank 
from  tying  up  its  funds  in  long-time  investments,  from  lending  too 
much  to  one  person  or  firm,  or  to  directors  or  officers  of  the  banks. 
Five  times  a  year  national  banks  have  to  furnish  full  statements  of 
their  condition  to  the  comptroller  of  the  currency  at  Washington. 
Each  bank  is  also  examined  twice  a  year,  without  notice,  by  federal 
bank  examiners. 

But  the  most  important  requirement  relates  to  the  money  re- 
serves that  must  be  held  by  national  banks.  Banks  in  "central 
reserve  cities  "  (which  at  present  are  New  York,  Chicago,  and  St. 
Louis)  are  required  to  maintain  a  "lawful  money  reserve"1 
equal  to  at  least  25  per  cent  of  their  deposits.  Banks  in  other 
"reserve  cities"  (including  at  present  about  forty  cities)  are  also 
required  to  maintain  25  per  cent  reserves,  but  their  deposits 
in  the  national  banks  of  the  central  reserve  cities  may  be 
counted  for  one  half  of  this  amount.  In  all  other  places  the  banks 
are  required  to  hold  a  15  per  cent  reserve,  three  fifths  of  which 

1  Including  all  kinds  of  United  States  money  except  subsidiary  silver,  minor 
coins,  and  national  bank  notes. 


CREDIT   AND    BANKING 


253 


may  consist  of  deposit  accounts  in  banks  in  central  reserve  cities 
or  other  reserve  cities.  In  all  cases  the  funds  kept  by  the  banks 
with  the  United  States  treasurer  for  the  redemption  of  their  notes 
are  counted  as  part  of  their  legal  reserves. 

The  New  York  Money  Market.  —  Under  the  operations  of  this 
system  the  cash  reserves  of  the  national  banks  are  centered  in  New 
York.  This  appears  clearly  in  Table  I,  which  shows  that  on  the 
date  specified  more  than  a  third  of  the  cash  reserves  of  the  6544 

TABLE  I 
DEPOSITS  AND  RESERVES  OF  NATIONAL  BANKS:  AUGUST  22,  1907' 


LOCATION 

No.  OF 
BANKS 

DEPOSITS  ' 

RESEKVE 

CLASSIFICATION  OF  RESERVE 

Amount  ' 

Ratios  J 

Lawful 
money  in 
bank  ' 

Due  from 
reserve 
agents  • 

Redemp- 
tion fund' 

New  York  

38 
M 
8 
306 
6178 

825-7 
262.9 
116.8 

1423-4 
2627.2 

221.3 

66.6 
27.6 
362.3 

443-5 

26.8 

25-3 
23.6 

25-5 
16.9 

218.8 
66.1 
26.8 
190.3 
199.6 

2.6 

0-5 
0.7 

6-3 
17.2 

Chicago  

St.  Louis  

165-7 
226.7 

Other  reserve  cities 
Country  banks  .  . 

Total  

6544 

5256-1 

1121.4 

21-3 

701.6 

392-4 

27-3 

1  Compiled  from  Report  of  the  Comptroller  of  the  Currency,  1007,  pp.  222-224. 
'  Millions  of  dollars.  •»  Per  cent. 

national  banks  in  the  United  States  were  in  the  vaults  of  thirty- 
eight  New  York  banks.1  These  figures  do  not,  however,  convey 
an  adequate  idea  of  the  national  importance  of  the  New  York  bank 
reserves.  New  York  is  the  great  wholesale  market  for  foreign  ex- 
change, the  chief  center  of  gold  movements  to  and  from  Europe, 
the  principal  importing  and  exporting  center  for  commodities,  — 
in  short,  the  chief  market  place  of  the  continent  and  the  focus  of 
financial  operations.  All  state  banks,  private  banks,  and  trust 
companies  of  importance  find  it  to  their  advantage  to  maintain 
deposit  accounts  in  New  York,  both  for  their  own  use,  and  in  order 

1  The  bulk  of  the  deposits  of  out  of  town  banks  were  in  from  twelve  to  twenty 
banks  which  make  a  specialty  of  this  kind  of  business. 


254  OUTLINES    OF   ECONOMICS 

that  they  may  supply  New  York  exchange  to  their  customers. 
Even  the  deposit  accounts  of  national  banks  in  New  York  are  in 
the  aggregate  considerably  larger  than  the  amount  they  are  allowed 
to  count  as  part  of  their  reserves. 

All  together  the  deposits  of  other  banks  constituted  more  than 
half  of  the  $825,700,000  of  deposits  in  New  York  national  banks 
in  August,  1907.  Moreover,  something  very  much  like  the  reserve 
system  obtains  among  other  than  national  banks,  the  banks  in 
smaller  places  keeping  deposits  in  national  or  other  banks  in  larger 
cities,  which  in  turn  keep  deposits  in  New  York.  The  trust  com- 
panies, and  some  of  the  state  banks  l  keep  in  general  very  much 
smaller  reserves  in  their  own  vaults  than  are  required  of  national 
banks,  —  a  fact  which  makes  the  strain  on  the  New  York  bank 
reserves  all  the  greater.  Recent  legislation  in  New  York  has 
raised  the  reserve  requirements  of  state  banks  and  trust  com- 
panies in  that  state. 

Like  an  inverted  pyramid  upon  its  apex,  the  great  structure  of 
bank  credit  in  the  United  States  rests,  in  large  measure,  upon  the 
money  reserves  of  the  New  York  banks.  Every  important  change 
in  the  demand  for  money  or  credit  in  any  part  of  the  country  has  an 
effect  on  the  New  York  money  market;  similarly,  every  important 
disturbance  in  the  New  York  money  market  affects  financial  con- 
ditions throughout  the  country. 

The  central  reserve  system  leads  to  a  great  economy  in  the  use 
of  money,  and  it  seems  to  be  a  natural  and  necessary  feature  of 
modern  banking,  for  something  like  it  is  found  in  all  of  the  leading 
commercial  nations,  —  although,  in  Europe,  the  central  reserves 
are  kept  in  one  great  bank  in  each  country.  Some  dangers  seem 
to  attend  its  use  in  the  United  States,  but  these  are  in  large  measure 
attributable  to  other  features  of  our  banking  system,  chief  among 
which  are  the  dominance  of  speculative  influences  in  the  New  York 
money  market,  the  independent  treasury  system,  and  the  lack  of 
elasticity  in  our  bank  note  issues. 

1  Savings  banks  keep  reserves  that  average  for  the  United  States  only  four 
fifths  of  one  per  cent  of  their  deposits.  On  account  of  the  nature  of  their  busi- 
ness, which  is  not  banking  in  the  commercial  sense,  they  are  a  negligible  factor 
in  this  connection. 


CREDIT   AND    BANKING 


255 


Speculation  and  the  New  York  Money  Market.  —  As  Table  II 
shows,  a  large  and  increasing  proportion  of  the  loans  of  New  York 
banks  are  not  based  on  "commercial  paper  " ;  that  is,  on  the  notes 
and  bills  of  exchange  that  arise  in  the  ordinary  course  of  business, 
but  are  either  time  loans  on  collateral  security  or  demand  loans, 
nearly  all  of  which  are  secured  by  collateral.  Most  of  these  col- 

TABLE  II 

LOANS  AND  DISCOUNTS  OF  NEW  YORK  NATIONAL  BANKS  ON  SPECIFIED 

DATES  l 

(In  millions  of  dollars.) 


CHARACTER  OP  LOAN 

1890 

1896 

1901 

IOO6 

On  demand    

IO2 

no 

27O 

1O  1 

On  time,  with  collateral  security  

A-I 

60 

I  2O 

IJQ 

On  time,  secured  by  commercial  paper  

152 

144. 

2O  T, 

240 

1  Compiled  from  Reports  of  the  Comptroller  of  the  Currency. 

lateral  securities  are  the  stocks  and  bonds  of  corporations,  and  the 
loans,  especially  the  demand  or  "call"  loans,  are  used  for  the 
greater  part  in  financing  speculation  in  such  securities.  This  sys- 
tem is  partly  responsible  for  the  excessive  and  useless  expansion  of 
speculation  over  and  above  the  amount  that  is  necessary  to  secure 
the  best  results  for  the  economic  interests  of  the  country.  Here 
we  are  concerned,  however,  with  its  effects  on  the  money  market. 
The  supply  of  call  loans  depends  primarily  on  the  amount  of  the 
surplus  reserves  of  New  York  banks;  that  is,  the  excess  of  the  re- 
serves over  and  above  the  legal  minimum  of  25  per  cent  of 
the  amount  of  the  deposits.  If  the  weekly  statement  of  the  clearing 
house  banks  l  shows  a  relatively  large  surplus  reserve,  this  means 
that  the  banks  can  safely  expand  their  loans,  —  the  knowledge  of 
which  fact  has  a  stimulating  effect  on  speculation.  If,  however, 
the  surplus  reserve  is  low,  the  banks  are  bound  to  restrict  their 
loans  of  all  kinds  and  to  "call"  some  of  their  demand  loans. 

1  Some  of  the  banks  in  the  clearing  house  are  state  banks,  but  by  the  rules  of 
the  clearing  house  these  were  required  to  maintain  the  same  reserve  as  national 
banks  even  before  recent  legislative  enactments. 


256  OUTLINES   OF  ECONOMICS 

When  the  reserve  is  below  the  legal  limit  demand  loans  have  to  be 
called  in  large  quantities  in  order  to  enable  the  banks  to  meet  press- 
ing demands  for  credit  on  the  part  of  their  regular  customers.1 
The  precipitate  calling  of  demand  loans  by  some  banks  simply  in- 
creases the  demand  for  credit  at  other  banks,  which  in  turn  have  to 
curtail  their  loans.  Such  a  condition  of  the  money  market  leads 
to  a  depression  in  the  price  of  speculative  securities,  which  is  in- 
creased by  the  forced  sales  of  securities  in  order  to  obtain  the  money 
funds  that  had  previously  been  lent  on  them;  the  fall  in  the  price 
of  securities  leads  brokers  to  demand  more  "margins"  from  the 
customers  for  whom  they  have  bought  securities,  and  it  leads  the 
banks  to  demand  more  securities  as  collateral  for  their  outstanding 
loans.  Under  such  conditions  the  interest  rate  on  call  loans  some- 
times goes  as  high  as  125  per  cent,  or  even  higher.2 

If  the  ruling  prices  of  speculative  securities  have  been  higher  than 
industrial  conditions  would  warrant,  such  a  disturbance  of  the 
money  market  is  apt  to  be  long  continued,  and  might  easily  develop 
into  a  general  financial  crisis.  The  call  loan  market  is  essentially 

1  The  rigidity  of  the  New  York  bank  reserves  is  itself  an  element  of  danger  to 
the  money  market.  The  Bank  of  England  protects  its  reserves  when  they  are 
threatened  by  the  simple  process  of  raising  its  discount  rate.  The  effect  of  this 
is  to  restrict  the  loans  of  other  banks  as  well  as  of  the  Bank  of  England  to  the 
more  necessitous  borrowers.  Under  our  national  banking  law  limiting  the  rate 
of  interest,  further  loans  have  to  be  stopped  absolutely  when  the  reserve  goes  below 
the  legal  minimum.  The  New  York  bank  reserve  is  accordingly  a  real  reserve 
only  in  the  sense  that  it  makes  it  possible  for  the  banks  to  meet  extraordinary 
demands  for  ready  cash.  So  far  as  the  extension  of  credit  is  concerned,  it  is  not 
a  reserve,  but  a  dead  line.  In  practice  the  law  is  not  rigidly  observed,  a  warning 
from  the  comptroller  of  the  currency  being  the  only  penalty  exacted  for  a  tem- 
porary deficit  in  the  reserves.  Nevertheless  the  reserve  does  not  often  fall  more 
than  one  or  two  points  below  the  legal  minimum.  The  sudden  curtailment  of 
loans  which  the  rigidity  of  the  reserve  entails  is  one  of  the  things  that  tends  to 
convert  an  incipient  panic  into  a  real  panic. 

3  That  is,  the  rate  on  what  may  be  called  marginal  call  loans,  effected  at  the 
stock  exchange  by  bankers'  agents,  or  by  individuals  or  corporations.  Many 
banks  continue  to  make  call  loans  to  their  regular  customers  at  such  times  at 
rates  not  exceeding  6  per  cent.  Under  normal  conditions  the  rate  on  call  loans 
is  lower  than  the  rate  on  time  loans.  For  the  period  1901-1906  the  bank  rate 
on  call  loans  averaged  3.3  per  cent  as  against  an  average  rate  of  about  4.5  per  cent 
on  time  loans.  Excessive  variability  is  the  chief  characteristic  of  the  call  loan 
rate.  Cf.  W.  A.  Scott,  "Rates  on  the  New  York  Money  Market,"  Journal  oj 
Political  Economy,  Vol.  XVI,  pp.  273-298. 


CREDIT   AND    BANKING 


257 


speculative,  and  it  is  unfortunate  that  the  condition  of  the  supply 
of  credit  for  the  normal  commercial  needs  of  the  country  should  be 
periodically  unsettled  on  account  of  this  fact.  In  no  other  great 
money  center  of  the  world  do  call  loans  occupy  the  important  place 
that  they  do  in  New  York.1 

The  Independent  Treasury  System.  — The  United  States  govern- 
ment is  to  a  very  large  extent  its  own  banker.  It  keeps  its  own 
money  in  its  own  strong  boxes,  quite  after  the  fashion  of  a  mediaeval 
monarch.  The  strong  boxes  in  this  case  are,  however,  the  vaults 
of  the  treasury  in  Washington  and  of  nine  sub-treasuries  located 
in  important  cities.  Apart  from  the  fact  that  the  government 
revenue  and  the  government  expenditures  are  naturally  not  dis- 
tributed evenly  throughout  the  year,  the  government  has  the  further 
difficulty  that  a  close  balance  of  revenues  and  expenditures  for  any 
given  year  must  be  wholly  accidental.  Even  if  the  federal  budget 
were  carefully  and  scientifically  constructed,  as  it  is  not,  the  public 
revenues  would  be  liable  to  uncertain  fluctuations,  —  a  result  in 
part  of  the  importance  of  customs  receipts  among  them.  The  gov- 
ernment, furthermore,  receives  most  of  its  income  in  money,  not 
in  bank  credit  instruments.  When  a  surplus  accumulates  in  the 
government  treasury,  that  much  money  is  taken  out  of  circulation, 
which  reduces  the  bank  reserves,  and  contracts  the  amount  of  bank 
credit  available. 

The  government  is  permitted,  however,  by  the  national  bank  act 
of  1863  to  deposit  money  in  selected  national  banks.  Some  secre- 
taries of  the  treasury  have  made  little  use  of  this  privilege,  but  in 
recent  years  such  deposits  have  become  more  common. 

Until  1902  banks  had  always  been  required  to  deposit  government  bonds 
with  the  federal  treasury  as  security  for  federal  deposits,  but  in  that  year  and 
again  in  1906  Secretary  Shaw  offered  to  accept  approved  state  and  munici- 
pal bonds  in  lieu  of  a  certain  amount  of  government  bonds,  on  condition 
that  the  latter  should  be  immediately  used  as  security  for  increased  note 
issues.  In  1897  only  168  banks  were  government  depositories.  In  1907 

1  The  control  of  groups  of  powerful  banks  by  great  chains  of  "financial  Inter- 
ests" is  another  anomalous  condition  of  the  New  York  money  market.  For 
an  account  and  criticism  of  this  situation  as  it  existed  in  1903,  see  C.  J.  Bullock, 
"The  Concentration  of  Banking  Interests  in  the  United  States,"  Atlantic 
Monthly,  Vol.  92,  pp.  182-192. 
s 


258  OUTLINES   OF  ECONOMICS 

there  were  1255,  which  held  on  June  20  of  that  year  $167,000,000  out  of  a 
total  treasury  balance  of  $422,000,000.  Part  of  this  increase  is  attributable 
to  the  effect  of  a  law  enacted  in  1907  allowing  custom  receipts  to  be  deposited 
in  banks.  Previously  to  this  deposits  could  only  be  made  from  the  proceeds 
of  internal  revenue  duties  and  miscellaneous  receipts.  The  Aldrich  act  of 
1908  provided  for  the  payment  of  one  per  cent  interest  on  all  government 
deposits  except  the  active  checking  accounts. 

The  government  has,  on  several  occasions,  come  to  the  rescue  of  the  banks 
by  cash  purchases  of  its  own  bonds.  The  decline  in  the  market  price  of 
government  bonds  in  periods  of  financial  stringency  makes  these  purchases 
relatively  advantageous  to  the  government.  The  periodic  shifting  of  govern- 
ment deposits  to  localities  where  money  is  most  needed,  the  temporary 
deposit  of  gold  in  New  York  banks  equal  in  amount  to  their  engagements  of 
gold  for  transportation  from  Europe,  and  even  the  arbitrary  withdrawal 
of  government  money  from  the  banks  when  it  was  "not  needed,"  in  order 
that  it  might  not  be  made  the  basis  of  speculative  activities  but  kept  till  the 
time  when  it  "was  needed,"  *  have  been  recent  developments  in  the  relation 
of  the  treasury  to  the  money  market. 

In  favor  of  this  system  as  at  present  developed  it  may  be  said  that  a  sur- 
plus in  the  government  treasury  constitutes  a  real  cash  reserve,  the  wise  use 
of  which  by  the  secretary  of  the  treasury  may  possibly  avert  a  serious  crisis. 
But  there  are  dangers  in  intrusting  so  much  financial  power  to  one  man. 
If  used  without  discretion  it  is  bound  to  do  more  harm  than  good.  More- 
over, some  of  the  recent  treasury  operations  have  not  been  free  from  the 
suspicion  of  favoritism  to  certain  banks.  It  is  to  be  feared,  too,  that  the 
knowledge  that  the  government  surplus  will,  in  time  of  necessity,  be  put  at 
their  disposal,  will  tend  to  encourage  unsound  banking  by  relieving  the 
banks  of  the  proper  responsibility  for  the  maintenance  of  their  own  reserves. 
All  in  all  it  seems  probable  that  a  definite  and  known  policy  with  regard  to 
government  deposits  is  better  than  the  recently  developed  system  of  un- 
certainty and  arbitrary  action. 

The  Movement  of  Money.  —  The  demand  for  loanable  funds 
varies  locally,  according  to  the  business  conditions  that  exist  in  dif- 
ferent parts  of  the  country.  These  differences  make  loans  worth 
more  in  some  localities  than  in  others,  and  result  in  some  shifting 
of  bank  credit.  New  York  banks,  for  example,  sometimes  invest 
in  "out  of  town"  commercial  paper  when  this  is  more  profitable 
than  employing  their  funds  at  home.  More  frequently,  interior 
banks  place  loans  in  New  York,  either  through  their  correspondent 
banks  there,  or  by  the  purchase  of  securities  from  note  brokers. 

1  See  Finance  Report,  1906,  p.  41. 


CREDIT   AND    BANKING 


259 


This  shifting  of  credit,  however,  is  unimportant  as  compared  with 
the  movement  of  money  itself.  Money  is  continually  flowing  from 
New  York  to  the  interior  and  from  the  interior  to  New  York,  ac- 
cording as  it  can  be  more  profitably  employed  in  bank  reserves  in 
one  place  or  the  other.  Similar  movements  take  place  between  the 
various  cities  of  the  country.  This  movement,  it  will  be  noted,  is 
not  one  that  is  apt  to  disturb  financial  conditions.  On  the  con- 
trary, it  tends  to  prevent  extreme  local  fluctuations  in  money  market 
conditions  by  leading  to  the  expansion  of  credit  where  it  is  most 
needed,  and  similarly,  to  the  contraction  of  credit  where  it  is  least 
needed. 

There  is  another  kind  of  money  movement,  however,  which  is 
not  so  fortunate  in  its  effects  upon  the  money  market.  The  amount 
of  money  needed  as  an  actual  medium  of  exchange  varies  for  dif- 
ferent seasons  and  for  different  localities.  The  demand  for  money 
to  serve  as  the  basis  of  credit  in  bank  reserves  and  the  demand  for 
money  as  an  actual  medium  of  exchange  are  different  and  compet- 
ing demands.  When  more  money  is  needed  as  a  medium  of  ex- 
change, reserves  have  to  yield  and  credit  has  to  be  contracted. 

The  most  important  movement  of  this  sort  is  in  response  to  the 
annual  demand  for  money  to  be  used  in  "moving  the  crops." 
Harvest  expenses  are  very  largely  wages,  and  these  have  to  be  paid 
in  cash.  Many  farmers,  moreover,  insist  on  receiving  money  pay- 
ments when  they  sell  their  crops.  The  cotton  crop  of  the  South 
and  the  grain  crop  of  the  West  necessitate  the  conversion  of  bank 
deposits  in  those  regions  into  money,  and  to  the  negotiation  of  loans 
on  the  security  of  the  crops,  the  proceeds  of  which  are  also  taken  in 
cash.  The  banks  in  these  sections  of  the  country  in  turn  convert 
their  deposits  in  other  banks  into  money,  and  in  large  part  this 
money  is  obtained,  directly  and  indirectly,  from  the  New  York 
bank  reserves.  The  movement  of  money  from  New  York  to  the 
South  and  West  usually  commences  in  August  of  each  year  and 
continues  through  November,  when  the  return  movement  sets  in, 
continuing  usually  till  February.  Despite  the  fact  that  the  New 
York  bankers  are  forewarned  of  this  movement,  it  always  reduces 
their  surplus  reserves  and  leads  to  stringent  and  often  precarious 
Conditions  in  the  New  York  money  market,  —  conditions  which  are 


260 


OUTLINES   OF  ECONOMICS 


frequently  reflected  in  difficulties  in  the  money  market  throughout 
the  country. 

Elastic  Currency.  —  To  the  arbitrary  flow  of  money  to  and  from 
the  treasury,  and  to  its  movement  to  and  from  the  interior,  there 
must  be  added  the  movement  of  gold  between  this  and  other  coun- 
tries. This  will  be  discussed  in  another  place;  it  is  sufficient  to 
note  at  this  point  that  this  external  money  movement  is  at  the  same 
time  a  cause  and  effect  of  changing  money  market  conditions. 

That  these  money  movements  affect  the  supply  of  bank  credit  as 
they  do  is  partly  attributable  to  the  inelastic  character  of  our  bond- 
secured  bank  currency.  Under  the  provisions  of  the  national  bank 
law  that  have  been  described,  the  variations  in  the  amount  of 
bank  notes  outstanding  bear  a  close  relation  to  variations  in  the 
price  of  government  bonds,  —  and  these  variations  are  affected  by 
many  other  things  than  money  market  conditions,  and  in  recent 
years  have  been  very  small. 

As  will  be  seen  in  Table  III,  the  creation  of  the  two  per  cent 
bonds,  payable  in  1930,  stimulated  the  issue  of  bank  notes,  because 

TABLE   III 

AMOUNTS  OF  BANK  NOTE  CIRCULATION  SECURED  BY  SPECIFIED 
CLASSES  OF  BONDS  :  1900-1907 l 


SECURITY 

March  13, 
1900 

Oct.  31, 
1903 

Oct.  31, 
1004 

Oct.  31, 
1005 

Oct.  31, 
1906 

Oct.  31. 
1907 

Loan  1908,  3*s  .  . 
Loan  1907,  4's  .  . 
Loan  1925,  4's  .  . 
Loan  1004,  5*5  .  . 
Loan  1891,  a's  .  . 
Consols  1930,  2's 
Panama  Canal  .  . 

$56,164,820 
130,302,250 
14,697,850 
21,906,350 
20,400,150 

$1,797,580 
2,797,200 
1,410,100 
718,650 

$1,922,940 
5,857,500 
1,791,600 

$2,215,540 
4.050-350 
4,465,000 

$3.»73-7oo 
25,124,650 
4,602,100 

$6,473.080 

10,732,900 

376,003,300 

416,972,75° 

483,181,900 

492,170,650 
14,482,080 

532,543,550 
17,245,380 

Total  

243,651,420 

382,726,830 

426,544,790 

493,912,790 

539,653,180 

566,994,910 

•From  Report  of  the  Comptroller  of  the  Currency,  Finance  Report,  1907,  p.  390. 

the  federal  tax  is  only  one  fourth  of  one  per  cent  semiannually  on 
bank  notes  secured  by  two  per  cent  bonds  as  against  one  half  of 
one  per  cent  on  notes  secured  by  bonds  paying  a  higher  rate  of 
interest.  The  relative  stability  of  the  amount  issued  in  more  recent 
years  is  noticeable,  what  increase  there  was  being  a  natural 


CREDIT   AND   BANKING  26i 

result  of  the  increasing  number  and  size  of  banks.  Nor  does  the 
amount  of  note  issue  respond  to  any  marked  extent  to  the  regu- 
lar seasonal  demands  for  money  to  move  the  crops  or  to  the  less 
regular  operations  of  the  treasury  department  or  of  the  foreign 
exchanges. 

Students  of  banking  problems  have  for  many  years  thought  that 
it  would  be  better  to  allow  the  national  banks  to  issue  part,  if  not 
all,  of  their  notes  on  the  security  of  their  general  assets,  thus  placing 
them  on  the  same  basis  as  deposits.  It  is  clear  that  if  this  were 
done  any  sudden  increase  in  the  demand  for  money  as  a  circulat- 
ing medium  might  be  met  by  the  creation  of  bank  credit  in  the  form 
of  bank  notes,  or  by  the  shifting  of  bank  credit  from  the  form  of 
deposits  to  the  form  of  note  issues.  "Asset  banking,"  as  this  is 
called,  is  used  in  Canada,  and  enables  the  banks  there  to  furnish 
money  for  crop  moving  purposes  without  endangering  their  re- 
serves. Most  of  the  great  national  banks  of  continental  Europe 
also  issue  notes  on  the  security  of  their  general  assets. 

To  achieve  real  elasticity  it  is  necessary  to  provide  for  the  ready 
contraction  of  note  issues  when  the  special  demand  for  money  is 
over  as  well  as  to  provide  for  their  ready  expansion  in  time  of  need. 
It  seems  probable  that  this  could  best  be  accomplished  under  the 
difficult  conditions  that  prevail  in  the  United  States  by  a  system 
similar  in  some  ways  to  that  governing  the  Reichsbank  of  Germany, 
whereby  all  note  issues  above  a  certain  amount  are  subject  to  a 
special  tax.  This  should  be  coupled,  however,  with  a  more  ade- 
quate mechanism  for  redeeming  the  notes  than  the  present  one, 
and  it  would  be  desirable  to  graduate  the  tax  according  to  the 
amount  of  the  excess  note  issues  outstanding. 

The  first  tangible  result  of  years  of  discussion  of  this  subject  in  Congress 
and  elsewhere  was  the  Aldrich  act  of  1908.  This  measure  supplements  the 
existing  system  by  permitting  banks  which  have  outstanding  notes  secured 
by  government  bonds  equal  in  amount  to  40  per  cent  of  their  capital  to  in- 
crease their  circulation  in  one  or  both  of  two  ways.  First,  on  the  security 
of  approved  state,  county,  or  municipal  bonds  deposited  with  the  treasurer 
at  Washington,  such  note  issues  being  restricted  to  90  per  cent  of  the  par 
value  of  the  bonds.  Second,  through  the  voluntary  organization  of  "Na- 
tional Currency  Associations,"  which  are  to  be  composed  of  not  less  than 
ten  banks  in  contiguous  territory  whose  combined  capital  is  not  less  than 


262  OUTLINES   OF  ECONOMICS 

$5,000,000.  Banks  in  such  associations  can  issue  notes  to  an  amount  not 
exceeding  30  per  cent  of  their  capital  and  surplus  on  the  basis  of  securities 
deposited  with  the  association,  if  the  securities  are  approved  by  the  associ- 
ation and  by  the  comptroller  of  the  currency.  Such  securities  may  be  (i) 
bonds  of  the  kind  that  may  be  used  for  the  extension  of  note  issue  under  the 
alternative  plan  already  mentioned,  in  which  case  the  issue  may  be  95  per 
cent  of  the  par  value  of  the  bonds,  or  (2)  two-name  commercial  paper  of 
not  over  four  months'  duration,  or  the  bonds  or  other  securities  of  corpora- 
tions, in  which  case  the  issue  must  not  exceed  75  per  cent  of  the  face  value 
of  the  securities.  The  association  is  responsible  for  the  maintenance  of  the 
redemption  fund  of  each  of  its  members.  A  bank's  entire  note  issue  must 
not  exceed  its  capital  and  surplus. 

The  extra  note  issues  authorized  by  the  Aldrich  act  must  not  at  any  time 
exceed  $500,000,000  in  the  aggregate,  and  are  taxed  at  the  heavy  rate  of  5 
per  cent  per  month  for  the  first  month  and  i  per  cent  for  each  additional 
month  up  to  a  maximum  of  10  per  cent.  Very  little  can  be  expected  from 
the  Aldrich  act  in  the  way  of  securing  elasticity  of  the  currency.  The  first 
of  the  two  alternative  methods  may  possibly  be  helpful,  but  the  excessive 
rate  of  taxation  will  tend  to  prevent  its  extensive  use  save  in  extreme  emer- 
gencies. It  is  difficult  to  organize  national  currency  associations  save  in 
important  financial  centers,  and  the  provision  for  the  use  of  corporate  securi- 
ties only  projects  into  the  field  of  note  issue  what  is  already  an  unfortunate 
tendency  of  deposit  banking  in  the  United  States.  The  Aldrich  act  may 
afford  some  relief  in  periods  of  the  most  extreme  stringency  in  the  money 
market  but  it  does  not  advance  us  very  far  toward  the  desired  goal  of  a  cur- 
rency that  will  automatically  expand  and  contract  with  business  needs. 
Some  favor  the  issue  of  such  a  currency  by  the  government  instead  of  the 
banks,  but  this  would  be  undesirable.  There  are  no  such  points  of  contact 
between  the  government  treasury  and  the  needs  of  the  business  world  as 
exist  in  the  case  of  the  banks.  Government  paper  currency  can  be  controlled 
in  amount  only  by  arbitrary  methods.  It  is  by  very  nature  inelastic. 

A  Central  Bank.  —  The  great  national  banks  of  European  coun- 
tries, such  as  the  Bank  of  England,  the  Bank  of  France,  and  the 
Imperial  Bank  of  Germany,  combine  the  functions  of  our  independ- 
ent treasury  system,  the  general  note  issue  functions  of  our  national 
banks,  and  the  function  of  the  New  York  national  banks  as  cus- 
todians of  the  central  reserve.  That  is,  they  have  a  practical 
monopoly  of  the  privilege  of  issuing  notes; 1  they  hold  the  govern- 

1  In  England  and  Germany  some  other  banks  than  the  central  banks  have  a 
limited  right  to  issue  notes,  but  this  is  only  a  survival,  a  vested  right,  which  in 
various  ways  is  gradually  being  extinguished. 


CREDIT   AND    BANKING 


263 


ment  funds  and  act  as  fiscal  agents  of  the  government,  and  they 
hold  the  ultimate  banking  reserves  of  their  respective  countries. 

The  United  States  Bank  (1791-1811)  and  the  Second  Bank  of 
the  United  States  (1816-1811)  were  institutions  of  this  kind.  In 
each  case  Congress  refused  to  recharter  the  bank  at  the  expiration 
of  its  original  twenty-year  charter.  In  each  case,  also,  this  oc- 
curred when  the  country  was  temporarily  under  the  dominance  of 
a  strong  democratic  sentiment  opposed  to  political  or  financial  cen- 
tralization in  any  form.  Jealousy  on  the  part  of  state  banks  was, 
however,  the  immediate  cause  of  the  demise  of  the  first  United 
States  bank,  while  the  second  succumbed  to  the  still  more  potent 
hostility  of  Andrew  Jackson.  There  are  many  who  think  that  the 
abandonment  of  the  independent  treasury  system  and  the  re- 
establishment  of  a  great  central  reserve  bank  would  be  the  best 
solution  of  our  currency  difficulties.  Such  a  bank  might  very 
properly  be  limited  to  the  field  of  issuing  notes,  and  receiving  the 
deposits  of  and  making  loans  to  the  government  and  other  banks. 

The  Present  Position  of  State  and  Private  Banks.  —  The  figures 
in  Table  IV  give  only  a  partial  idea  of  the  present  position  of  bank- 

TABLE  IV 

NUMBER  OF  BANKS  AND  AMOUNT  OF  DEPOSITS  IN  SPECIFIED  KINDS  OF 

BANKS:  1907 ' 


• 

NUMBER  or 
BANKS 

DEPOSITS 

State  banks        

0,067 

$3,068,600,000 

Savings  banks                                  

i,4ic 

3  .  .10  £.  .100.000 

Private  banks                        

1,141 

151,100,000 

Loan  and  trust  companies      

704 

3,061,600,000 

National  banks                                              .... 

6,420 

4.722.000.000 

Total  

19,746 

$13,099,600,000 

1  From  Report  of  Comptroller  of  the  Currency,  Finance  Report,  1007,  p.  418. 

ing  in  the  United  States,  for  while  they  are  complete  as  to  national 
banks,  there  were,  in  1907,  over  4000  other  banks  which  failed  to 
make  reports  to  the  comptroller  of  the  currency. 


264  OUTLINES   OF   ECONOMICS 

"State  banks,"  in  the  narrow  sense,  include  only  corporations  chartered 
by  the  individual  states  to  conduct  a  general  commercial  banking  business. 
In  a  broader  sense  savings  banks  and  trust  companies  incorporated  under 
state  law  may  be  said  to  be  state  banks. 

Savings  banks  do  not  usually  do  a  commercial  banking  business ;  that  is, 
they  are  not  engaged  in  the  sale  of  bank  credit  in  a  form  that  can  be  used  in 
making  payments.  Their  deposit  accounts  are  not  usually  transferable  by 
means  of  checks.  They  receive  deposits  of  small  savings  and  invest  them 
in  long  time  securities,  such  as  real  estate  mortgages  and  bonds  of  various 
sorts.  They  perform  an  important  social  service  by  stimulating  saving  and 
by  increasing  the  financial  power  of  small  investors  through  concentrating 
and  combining  their  resources.  Savings  banks  are  organized  either  as  cor- 
porations or  as  mutual  societies  managed  by  a  board  of  trustees  acting  for 
the  depositors.  The  latter  type  is  especially  common  in  the  eastern  states. 
The  advantages  of  savings  banks  are  less  available  in  the  rural  districts 
than  in  the  cities,  —  a  fact  which  is  perhaps  the  strongest  argument  for  the 
establishment  of  postal  savings  banks  by  the  federal  government. 

Trust  companies  were  at  first  organized  to  take  charge  of  trust  funds  and 
to  act  as  executors  and  administrators  of  estates.  They  have,  however, 
developed  the  functions  of  both  savings  banks  and  commercial  banks,  and 
have  even  entered  such  specialized  banking  fields  as  foreign  exchange  and 
the  underwriting  of  corporation  securities.  They  have  thus  the  character 
of  free  lances  in  the  banking  field.  Their  banking  functions  have  developed 
so  rapidly  that  in  many  states  they  have  been  put  under  no  such  rigid  control 
as  is  exercised  over  state  and  savings  banks. 

Private  banks  are  of  two  very  distinct  types.  Some  are  small  unincor- 
porated banks  in  country  towns.  Others  are  great  concerns  in  the  financial 
centers  which  deal  in  investment  securities,  buy  and  sell  foreign  exchange, 
finance  great  corporate  undertakings,  and,  in  some  cases,  act  as  brokers  in 
the  stock  market.  • 

It  is  impossible,  in  fact,  to  draw  a  definite  line  between  "banking"  and 
other  financial  undertakings.  Building  and  loan  associations,  private  money 
lenders,  note  brokers,  life  insurance  companies,  etc.,  frequently  perform 
functions  which  are  very  much  like  some  kinds  of  "banking."  But  banking 
as  the  institution  which  converts  personal  credit  into  bank  credit  in  the  form 
of  deposit  accounts  and  bank  notes  is  a  clearly  defined  thing,  and  has  a  dis- 
tinct economic  significance  of  its  own. 


QUESTIONS 

1.  Do  you  make  a  loan  to  the  government  when  you  receive  greenbacks 
as  money  ? 

2.  Compare  the  history  of  the  assignats  of  the  French  revolution  with 
the  history  of  the  bills  of  credit  issued  by  the  Continental  Congress. 


CREDIT   AND    BANKING 


265 


3.  Explain  the  various  items  in  the  published  "statement"  of  a  national 
bank. 

4.  Because  a  national  bank  can  buy  interest-bearing  government  bonds 
and  use  them  as  security  for  its  own  issues  of  paper  money,  advocates  of 
government  paper  money  issues  have  alleged  that  it  gets  "double  interest 
on  its  money."     Is  this  true? 

5.  How  should  one  compare  the  profitableness  of  issuing  notes  with  the 
profitableness  of  extending  deposit  credit? 

6.  What  restrictions  does  your  state  impose  on  state  banking  corporations  ? 

7.  Why  would  wheat  not  make  a  satisfactory  money  commodity?    iron? 
platinum  ?     diamonds  ? 

8.  Would  it  be  possible  to  maintain  a  seigniorage  of  10  per  cent  on  United 
States  gold  coinage? 

9.  Report   on   the   following   questions  not   answered   in   this  chapter: 
(i)  What  is  the  "limit  of  tolerance"?     (2)  On  whom  does  the  loss  due  to 
the  wear  of  gold  coin  fall  ?     (3)  To  what  extent  are  different  kinds  of  United 
States  money  legal  tender? 

10.  If  the  United  States  had  adopted  the  free  and  unlimited  coinage  of 
silver  in  1896,  how  would  prices  have  been  affected? 

11.  Is  the  actual  standard  of  value  pure  gold  or  gold  of  standard  fineness? 

12.  What  elements  of  truth  are  there  in  the  statement  that  "coins  get 
their  value  from  the  government  stamp"  ? 

13.  Would  it  be  possible  to  have  a  standard  of  value  that  could  not  be 
used  as  a  medium  of  exchange? 

REFERENCES 

BULLOCK,  C.  J.     Essays  in  the  Monetary  History  of  the  United  States. 

CLEVELAND,  F.  A.     Funds  and  Their  Uses. 

Comptroller  of  the  Currency,  Annual  Report. 

CONANT,  C.  A.     History  of  Modern  Banks  of  Issue. 

DEWEY,  D.  R.     Financial  History  of  the  United  States.     (See  index.) 

Director  of  the  Mint,  Annual  Report. 

DUNBAR.     Chapters  on  the  Theory  and  History  of  Banking. 

HEPBURN,  A.  B.     The  Contest  for  Sound  Money. 

Indianapolis  Monetary  Commission,  1898  Report. 

JEVONS,  W.  S.     Money  and  the  Mechanism  of  Exchange. 

JOHNSON,  J.  F.     Money  and  Currency. 

KIXLEY,  DAVID.     The  Independent  Treasury  System;  also,  Money. 

KNOX,  J.  J.    History  of  Banking  in  the  United  States,  and  United  States  Notes. 

LAUGHLIN,  J.  L.     History  of  Bimetallism  in  the  United  States,  and  The 

Principles  of  Money. 
MITCHELL,  W.  C.     History  of  the  Greenbacks,  and  Gold,  Prices,  and   Wages 

under  the  Greenback  Standard.     (University  of  California  Publications, 

Economics,  Vol.  I.) 


266  OUTLINES   OF  ECONOMICS 

No  YES,  A.  D.     Thirty  Years  of  Arnerican  Finance. 

PRATT,  S.  S.     The  Work  of  Watt  Street. 

SCOTT,  W.  A.     Money  and  Banking. 

SUMNER,  W.  G.     History  of  Banking  in  the  United  States. 

Treasurer  of  the  United  States,  Annual  Report.  (This,  together  with 
abbreviated  forms  of  the  reports  of  the  Director  of  the  Mint  and  the 
Comptroller  of  the  Currency,  are  printed  as  appendices  to  the  Report 
of  the  Secretary  of  the  Treasury  in  the  bound  edition  of  the  annual 
Finance  Report.) 

WALKER,  F.  A.     Money,  and  Money  in  its  Relation  to  Trade  and  Industry. 

WATSON,  D.  K.     History  of  American  Coinage. 

WHITE,  HORACE.     Money  and  Banking. 


CHAPTER  XVI 
OTHER  PROBLEMS   IN   MONEY   AND   BANKING 

Crises.  —  Crises  are  frequently  recurring  phenomena  of  current 
economic  life.  They  are  of  all  degrees  of  severity,  but  are  generally 
characterized  by  a  scarcity  of  bank  credit,  a  sudden  drop  in  prices, 
industrial  depression,  lack  of  employment  for  wage  earners,  and 
kindred  symptoms. 

Crises  are  frequently  attributed  to  "over  production, "  or,  when 
that  expression  is  criticised  (because  human  wants  are  never  fully 
satisfied)  to  "under  consumption."  The  two  expressions  are  dif- 
ferent ways  of  describing  the  same  thing,  and  both  are  misleading 
because  they  put  the  emphasis  in  the  wrong  place.  Production 
and  consumption  have  to  do  with  quantities  of  things  and  their 
fitness  to  satisfy  human  wants.  Crises  spring  from  mishaps  in  the 
valuation  of  things;  they  relate  to  what  might  be  called  the  dollars 
and  cents  aspect  of  economic  life.  It  is  difficult,  even  impossible, 
for  observers  to  analyze  all  the  factors  entering  into  a  particular 
crisis,  and  it  is  even  more  difficult  to  formulate  a  theory  of  crises 
that  will  be  of  general  applicability.  There  are  some  important 
things  about  crises,  however,  that  are  relatively  well  known,  and 
these  will  form  the  basis  of  our  discussion. 

It  is  a  significant  fact  that  crises  generally  occur  only  as  sharp 
interruptions  of  periods  of  business  prosperity,  when  credit  is  abun- 
dant, prices  relatively  high,  and  employment  plentiful.  What- 
ever may  be  the  cause  of  a  period  of  exceptional  business  prosperity, 
it  is  apt  to  contain  within  itself  the  seeds  of  its  own  destruction. 
The  point  will  appear  clearly  if  we  put  together  two  conclusions 
that  were  reached  in  the  preceding  chapter:  first,  that  the  supply 
of  loanable  funds  in  the  form  of  bank  credit  is  a  function  of  two 
variables,  —  the  supply  of  personal  credit  and  the  supply  of  money 

267 


268  OUTLINES   OF  ECONOMICS 

available  for  bank  reserves;  second,  that  personal  credit  is  based  on 
the  probable  amount  of  future  incomes  and  probable  future  value 
of  property. 

Suppose,  for  example,  that  business  conditions  are  prosperous 
and  promise  to  continue  so,  and  that  there  is  a  plentiful  supply  of 
money  in  the  bank  reserves.  Expected  prices  and  expected  profits 
are  large,  expected  interest  payments  seem  certain.  The  power  to 
get  this  future  income  depends,  however,  upon  the  possession  of 
land,  capital  goods,  franchises  and  other  privileges,  the  estab- 
lished business  relations  that  give  rise  to  "  good-will  values,"  or  upon 
the  possession  of  income-yielding  securities,  such  as  mortgages, 
bonds,  stocks,  etc.  Under  such  conditions,  these  things  command 
good  prices  in  the  market  and  may  easily  be  hypothecated,  either 
formally  or  implicitly,  in  order  to  secure  purchasing  power,  — 
bank  credit.  The  bank  credit  thus  created  is  put  into  further  in- 
vestments of  capital  and  into  the  creation  of  further  business 
opportunities.  These  things  serve  in  turn,  so  long  as  their  income- 
yielding  power  seems  certain,  as  the  basis  of  further  extensions  of 
bank  credit,  and  thus  the  process  of  business  expansion  continues 
in  a  cumulative  fashion.  An  extensive  period  of  increasing  pros- 
perity of  this  kind  is,  however,  scarcely  possible  unless  the  supply 
of  money  is  increasing;  for  bank  reserves  as  well  as  the  amount  of 
expected  personal  incomes  condition  the  supply  of  purchasing 
power. 

Any  one  of  a  number  of  things  may  be  sufficient  to  precipitate  a 
panic  under  such  conditions.  The  whole  business  structure  may 
fall  to  pieces  through  sheer  topheaviness.  That  is,  so  much  pro- 
duction to-day  is  indirect,  so  large  a  share  of  productive  effort  is 
devoted  to  forwarding  in  indirect  ways  the  production  of  goods  that 
will  be  ripe  for  human  use  only  in  the  comparatively  distant  future, 
that  the  mere  operations  of  supply  and  demand  among  business 
men  themselves  may  maintain  prosperous  business  conditions  for 
some  time.  But  in  the  long  run  the  maintenance  of  the  values  of 
producers'  goods  and  privileges  depends  on  the  demand,  and  hence 
on  the  income,  of  ultimate  consumers.  Wages  do  not  usually  rise 
as  rapidly  as  prices  in  periods  of  business  expansion.  This  simple 
fact  may  in  itself  keep  the  average  purchasing  power  of  consumers 


PROBLEMS   IN   MONEY   AND    BANKING  269 

from  expanding  rapidly  enough  to  furnish  a  solid  support  for  the 
growing  structure  of  capital  values. 

Crop  failures  may  precipitate  a  panic  by  diminishing  the  pur- 
chasing power  of  those  engaged  in  agriculture,  and,  possibly,  by 
reducing  exports  and  thus  necessitating  the  taking  of  gold  from 
the  bank  reserves  to  ship  to  Europe  in  payment  for  our  imports. 
When  the  credit  situation  is  at  all  strained  the  failure  of  one  im- 
portant bank  may  be  enough  to  precipitate  a  panic.  The  bank's 
creditors  are  prevented  from  meeting  their  own  obligations;  the 
solvency  of  others  is  in  turn  dependent  upon  them,  and  thus  losses 
in  expected  and  often  already  hypothecated  income  are  transmitted 
from  firm  to  firm  and  from  industry  to  industry  in  a  constantly 
widening  circle. 

In  fact,  whatever  may  be  the  immediate  cause  of  a  panic,  it  is 
bound  to  grow,  in  a  condition  of  inflated  capital  values,  with  tre- 
mendous rapidity.  The  collapse  of  credit  leads  to  forced  sales  of 
property  in  order  that  credit  obligations  may  be  met.  These  lower 
property  values,  lessen  the  security  on  which  credit  is  founded,  and 
render  banks  less  able  and  less  willing  to  make  loans.  Moreover, 
the  hoarding  of  money,  which  is  apt  to  be  a  feature  of  a  panic,  has 
a  destructive  effect  on  bank  reserves.  In  a  serious  panic  the 
liquidation  of  obligations  has  to  work  itself  out.  Then  the  indus- 
trial process  starts  afresh,  with  lowered  values,  and  with  property 
rights  shifted,  in  some  measure,  to  creditors. 

Crises  seem  to  be  unpreventable  so  long  as  competition  and  the 
credit  system  dominate  in  industry.  Yet  there  are  some  recent 
developments  that  may  make  them  less  frequent,  and  possibly  less 
serious. 

The  "integration  of  industry,"  whereby  a  whole  series  of  pro- 
ductive processes,  from  the  production  of  the  raw  material  to  the 
sale  of  the  finished  product,  are  brought  together  under  one  man- 
agement, decreases  the  number  and  complexity  of  credit  relations 
between  producers,  and  tends  to  prevent  the  undue  expansion  of 
those  parts  of  the  productive  process  that  are  farthest  removed 
from  the  consumer.  The  strong  position  of  the  steel  industry  in 
the  United  States  is  a  case  in  point.  The  improvements  in  the 
bargaining  power  of  wage  earners  resulting  from  their  organization 


270  OUTLINES   OF  ECONOMICS 

have  enabled  them  partly  to  prevent  the  widening  of  the  gap  be- 
tween wages  and  prices  in  prosperous  times,  as  recent  American 
statistics  show.  On  the  other  hand,  crop  failures  are  and  always 
will  be  a  factor  of  uncertainty.  The  lack  of  an  elastic  currency  is 
also  an  element  of  danger,  but  this  can  and  should  be  remedied. 

The  Economic  Effects  of  Changes  in  the  Value  of  Money.  —  It 
has  already  been  suggested  that  an  increase  in  the  amount  of 
money  available  for  bank  reserves  leads  to  the  expansion  of  credit, 
stimulates  business,  and  as  a  result  usually  increases  prices,  — 
temporarily,  at  least.  The  same  results  are  achieved,  although  in 
not  the  same  way,  by  a  depreciation  in  the  value  of  money,  such  as 
comes  from  a  sudden  change  in  the  standard  of  value,  or  from  the 
introduction  of  irredeemable  paper  money  as  the  medium  of  ex- 
cMange.  Without  understanding  the  exact  process  we  know  that 
prices  are  gradually  increased  under  such  conditions,  there  being 
an  unmistakable  tendency  to  adjust  them  to  the  change  in  the 
"dollar"  or  other  unit  of  the  medium  of  exchange.1  The  rising 
prices  stimulate  business  by  increasing  profits.  Profits  are  in- 
creased because  most  of  the  expenses  of  production  are  incurred 
before  the  goods  are  sold,  so  that  the  rise  in  prices  increases  the 
margin  between  prices  and  the  expenses  of  production,  and  be- 
cause, moreover,  some  of  the  expenses  of  production  do  not  usually 
rise  as  rapidly  as  do  prices.  An  expansion  of  business  activity  of 
the  kind  already  described  is  apt  to  be  the  result,  and  this  is  not 
generally  soon  restrained  by  insufficient  bank  reserves,  for  de- 
preciated money  is  usually,  though  not  always,  money  that  is 
coined  or  issued  in  large  quantities. 

That  periods  of  prosperity  induced  in  this  way  are  inevitably 
short-lived  and  usually  end  in  severe  crises  does  not  make  them  any 
the  less  real.  Nor  should  the  fact  that  such  artificial  conditions 
of  business  enterprise  are  apt  to  be  accompanied  by  excessive 

1  Possibly  the  effect  upon  other  prices  of  the  increased  prices  (measured  in 
the  depreciated  money)  that  have  to  be  paid  for  imported  commodities  and  that 
are  received  for  exported  commodities  is  the  key  to  this  problem,  just  as  it  was 
undoubtedly  the  chief  cause  of  the  rise  of  prices  to  fit  the  bullion  value  of  coins 
from  which  seigniorage  had  been  taken.  This  is  the  explanation  of  the  rise  of 
prices  under  the  greenbacks  suggested  by  Professor  W.  C.  Mitchell,  the  historian 
of  that  movement. 


PROBLEMS   IN   MONEY  AND    BANKING  271 

speculation  and  other  unhealthy  features  blind  us  to  the  fact  that 
they  accomplish  some  good.  The  encouragement  given  to  ven- 
turesome undertakings  leads  to  the  trial  of  new  methods  of 
production,  to  the  development  of  new  natural  resources,  to  under- 
takings of  vast  proportion,  to  a  general  freeing  of  industrial  organi- 
zation and  methods  from  the  restraints  of  habit  and  tradition. 
The  foundations  of  modern  large-scale  industry  in  the  United 
States  were  laid  in  the  period  between  the  Civil  War  and  the  panic 
of  1873.  The  period  of  state  bank  note  inflation  preceding  the 
panic  of  1837  was  a  period  in  which  the  industrial  map  of  the 
United  States  was  almost  wholly  changed,  and,  in  the  long  run, 
for  the  better. 

A  rapid  increase  in  the  supply  of  standard  money  may  have  a 
similar  effect.  A  tremendous  expansion  of  international  trade 
followed  the  gold  discoveries  in  California  and  Australia.  In  the 
sixteenth  century,  increases  in  the  supply  of  the  money  metals, 
economic  writers  are  agreed,  hastened  the  fall  of  the  medizeval 
economic  system.  The  almost  unparalleled  development  of  in- 
dustry and  industrial  organization  in  the  United  States  since  1897, 
must,  with  its  good  features  as  well  as  its  bad,  be  attributed  in  part 
to  the  increased  supply  of  gold. 

Business  prosperity,  however,  does  not  always  coincide  with  the 
real  economic  welfare  of  the  masses  of  the  people.  If  prices  are 
rising  faster  than  money  wages,  real  wages  are  obviously  declining. 
A  period  of  falling  prices  is  very  apt  to  be  a  period  of  increasing 
well-being  for  those  whose  incomes  are  wages  or  salaries,  although 
here  we  have  to  remember  that  even  if  daily  or  weekly  wages  do 
not  fall  so  rapidly  as  prices,  an  increase  of  unemployment  may 
affect  total  yearly  incomes  adversely. 

The  Standard  of  Deferred  Payments.  —  The  relation  of  changes 
in  the  purchasing  power  of  money  to  long-time  debts  and  credits 
has  been  suggested  in  another  connection.  If  prices  increase,  the 
principal  of  a  loan  represents  less  purchasing  power  at  time  of  re- 
payment than  at  the  time  the  loan  was  made.  If  prices  decrease, 
the  reverse  is,  of  course,  true.  In  periods  of  cheap  money  agita- 
tions the  additional  burdens  imposed  upon  debtors  in  a  period  of 
decreasing  prices  are  emphasized.  An  important  function  of 


272  OUTLINES   OF  ECONOMICS 

money,  then,  is  found  in  its  use  as  a  standard  of  deferred 
payments.1 

As  Professor  Irving  Fisher  has  shown,  there  is  a  partial  com- 
pensation for  the  injustice  worked  to  debtors  or  creditors  by  chang- 
ing money  values  in  the  fact  that  the  interest  rate  varies  inversely 
with  the  value  of  money.  If  the  value  of  money  is  increasing  and 
promises  to  continue  to  increase,  money  lenders  are  forced  by  com- 
petition to  offset  the  expected  increase  in  the  value  of  a  loan  by 
accepting  a  lower  interest  rate.  When  the  value  of  money  is  de- 
creasing, the  expected  decline  in  the  value  of  the  principal  causes  a 
higher  rate  of  interest  to  be  charged.  So  far  then  as  the  increase 
in  the  value  of  the  principal  is  discounted  in  the  interest  rate  at  the 
time  when  a  loan  is  made,  to  that  extent  is  the  debtor's  claim  of  in- 
justice unfounded.  The  decline  in  the  interest  rate  as  prices  de- 
crease makes  it  possible,  moreover,  for  debtors  to  pay  off  their  old 
obligations  with  money  funds  borrowed  on  more  favorable  terms. 
We  may  expect  that  less  emphasis  will  be  given  to  the  question  of 
the  standard  of  deferred  payments  in  future  periods  of  declining 
prices,  because  American  farmers  are  becoming  in  increasing 
numbers  lenders  rather  than  borrowers  of  money.  Corporation 
bonds  are  taking  the  place  of  farm  mortgages  as  the  most  significant 
form  of  long-time  credit  instruments. 

Index  Numbers.  —  Changes  in  the  purchasing  power  of  money 
are  indicated  statistically  by  the  use  of  index  numbers.2  The 
prices  of  a  number  of  important  commodities  in  some  one  year,  or 
their  average  prices  for  a  term  of  years,  are  taken  as  the  basis  of  the 
computation.  The  price  of  each  commodity  in  each  year  covered 

1  From  the  analysis  in  the  preceding  chapters  it  should  be  clear  that  money 
serves  also  as  (i)  the  medium  of  exchange  and  measure  or  denominator  of  value, 
(2)  the  standard  of  value,  (3)  the  basis  of  bank  credit.  The  first  of  these  functions 
is  performed  by  all  money;  the  second  function  only  by  standard  money  and 
bullion;  the  third  by  all  money  that  can  be  lawfully  used  in  bank  reserves.  Legal 
tender  money,  and,  if  there  are  differences  in  the  value  of  different  kinds  of  money, 
the  cheapest  legal  tender  money,  serves  as  the  standard  of  deferred  payments. 
Before  the  development  of  credit  facilities  one's  purchasing  power  did  not  depend 
so  much  on  his  property  as  on  his  own  stock  of  ready  cash.  An  important  early 
function  of  money  was,  accordingly,  that  of  a  store  or  reserve  of  value  or  purchasing 
power. 

*  Cf.  the  table  on  p.  240. 


PROBLEMS   IN  MONEY  AND   BANKING 


273 


by  the  statistics  is  then  stated  as  a  per  cent  of  its  price  in  the  basing 
year  or  years.  The  series  of  per  cents  thus  obtained  are  called 
relative  prices.  These  relative  prices  are  then  combined  into  typi- 
cal prices,  or  index  numbers  for  each  year.  Most  frequently  a 
simple  arithmetic  average  of  the  various  relative  prices  for  a  given 
year  is  used  as  the  relative  typical  relative  price.  Sometimes  a 
weighted  arithmetic  average  is  used.  This  differs  from  the  simple 
average  in  that  the  relative  prices  of  the  more  important  com- 
modities are  counted  more  than  once  in  making  up  the  average,  — 
the  precise  amount  of  weight  given  to  them  being  fixed  according 
to  the  importance  of  the  commodities  to  which  they  relate.  Weight- 
ing is  not  of  great  practical  importance  unless  the  list  of  commodi- 
ties used  is  very  small,  or  unless  the  index  number  is  to  be  used  for 
some  special  purpose,  —  such  as  to  show  changes  in  the  cost  of 
living,  where  relative  prices  are  weighted  according  to  the  average 
distribution  of  the  expenditures  of  families  in  the  wage-earning 
classes. 

A  simple  and  useful  way  of  obtaining  a  typical  price  is  to  find  the 
median.  The  median  is  the  relative  price  which  divides  all  of  the 
relative  prices  for  a  given  date  into  halves,  —  one  half  being  lower 
and  one  half  being  higher  than  the  median.  Less  used  are  the 
mode,  —  the  relative  price  that  occurs  most  frequently  in  a  given 
year,  —  and  the  geometric  average,  —  the  wth  root  of  the  prod- 
uct of  the  relative  prices  of  n  commodities.  Much  has  been 
written  about  the  relative  advantages  of  the  different  kinds  of 
averages,  but  the  questions  involved  are  highly  technical.  Whether 
one  kind  of  average  is  better  than  another  usually  depends  upon 
the  character  of  the  data  and  the  use  that  is  to  be  made  of  the  re- 
sults. Statisticians  now  emphasize  the  importance  of  knowing 
the  distribution  as  well  as  the  trend  of  price  changes.  That  is,  in 
order  to  know  whether  the  average  is  really  typical  of  the  different 
relative  prices  we  should  know  how  closely  most  of  them  approxi- 
mate to  it.  The  range  of  the  variation  of  the  different  relative 
prices  from  the  average  might,  for  example,  be  comparatively 
small  below  the  average  and  comparatively  large  above  it.  There 
are  various  ways  of  measuring  and  stating  the  distribution  of 
prices. 


274  OUTLINES    OF   ECONOMICS 

Wage  changes  as  well  as  price  changes  can  be  measured  in  index 
numbers.  Weighting  is  of  more  importance  in  the  case  of  relative 
wages  than  in  the  case  of  relative  prices,  because  the  number  of 
men  represented  in  the  data  for  single  series  of  relative  wages  (such 
as  those  in  a  given  occupation  in  a  given  establishment)  is  con- 
stantly changing. 

Index  numbers  are  available  for  the  United  States  for  the  period 
since  1860.  For  the  period  1860-1880  Mitchell's1  are  the  best; 
the  period  from  1890  to  the  present  is  covered  by  the  United  States 
Bureau  of  Labor,2  and  for  the  gap  from  1880  to  1890  Falkner's  are 
available.3  Dun's  Review  and  Bradstreei's  also  publish  tables  of 
price  changes.4 

Some  writers  have  suggested  the  possibility  of  a  tabular  standard 
of  value,  to  be  maintained  by  frequently  changing  the  value  of  the 
money  unit  in  accordance  with  the  showings  of  an  officially  kept 
system  of  index  numbers.  To  do  this  by  periodically  altering  the 
amount  of  bullion  in  standard  money  would  be  impracticable, 
while  to  abandon  the  use  of  a  standard  commodity  and  to  attempt 
to  regulate  prices  by  issuing  fiat  money  and  controlling  the  amount 
in  circulation  would  be,  as  we  have  seen,  chimerical.  A  tabular 
standard  of  deferred  payments  might  be  put  in  operation  by  laws 
providing  for  the  increase  or  diminution  of  the  principal  of  debts 
according  to  changes  in  prices.  It  is  probable,  however,  that  this 
would  be  satisfactory  to  neither  debtors  nor  creditors.  The  really 
essential  thing  is  to  have  a  commodity  standard  of  value  that  shall 
be  as  stable  as  possible,  and  to  maintain  the  convertibility  of  all 
other  forms  of  money  with  it.  With  gold  as  the  standard  of  value, 
and  with  all  other  forms  of  money  redeemable  in  gold,  changes  in 
prices  are  not  apt  to  be  rapid  enough  to  work  much  injustice  to 
either  debtor  or  creditor.  The  compensating  influence  of  changes 
in  the  interest  rate  must  also  be  taken  into  account.  The  question 
of  the  grievances  of  debtors  and  creditors  has  been  overemphasized 

1  In  his  Gold,  Prices,  and  Wages  under  the  Greenback  Standard. 

3  In  various  numbers  of  the  Bulletin  of  the  Bureau  of  Labor. 

"In  "Aldrich  Report"  on  Wholesale  Prices,  Wages,  and  Transportation, 
Senate  Doc.,  32d  Cong.,  ad  Session,  No.  1394. 

*  For  an  exhaustive  account  of  various  index  numbers  and  other  price  statistics 
see  Laughlin,  The  Principles  of  Money,  pp.  171-211. 


PROBLEMS   IN   MONEY   AND    BANKING 


275 


as  compared  with  the  really  important  economic  problems  growing 
out  of  changes  in  the  value  of  money.  These  are,  as  we  have  seen, 
first,  the  effect  on  business  enterprise,  and  second,  the  effect  on  real 
incomes  as  distinguished  from  money  incomes. 

Value  of  Money.  —  We  have  not  as  yet  answered  one  very 
important  question,  and  that  is,  "What  determines  the  value  of 
money?"  Now  by  the  "  value  of  money"  we  cannot  mean  any- 
thing but  the  purchasing  power  of  money.  There  is  no  such  thing 
in  fact  as  "the  general  purchasing  power  of  money,"  although  we 
have  found  it  convenient  to  use  that  and  similar  expressions. 
Money  has,  in  reality,  a  large  number  of  different  values,  measured 
by  the  different  quantities  of  different  things  that  it  will  purchase. 
If  the  price  of  wheat  is  one  dollar  per  bushel,  then  one  value  —  the 
wheat  value  —  of  money  is  a  bushel  per  dollar.  Similarly,  the 
purchasing  power  of  money  in  sirloin  steaks  may  be  four  pounds 
per  dollar.  But  how  are  we  to  blend  sirloin  steaks,  wheat,  and 
other  things  into  one  concept  ?  Index  numbers  do  not  tell  us  what 
the  general  value  of  money  is;  they  simply  reveal  average  varia- 
tions in  the  different  values  of  money.  The  concept  of  the  general 
value  of  money  is  simply  a  useful  abstraction,  based  on  a  broad 
view  of  all  its  different  specific  values. 

When  we  fix  our  attention  upon  changes  in  the  various  purchas- 
ing powers  of  money,  however,  we  are  able  to  make  a  distinction 
between  changes  that  are  widespread  and  fairly  uniform,  and 
changes  that  affect  only  one  or  two  commodities.  For  example,  a 
new  invention  may  decrease  the  price  of  a  particular  commodity, 
without  affecting  the  prices  of  other  things  except  through  the 
shifting  of  demand  from  other  things  to  the  commodity  in  question, 
—  an  effect  which  would  usually  be  slight  so  far  as  the  price  of  any 
one  of  these  other  things  is  concerned,  as  the  demand  would  prob- 
ably be  shifted  from  many  different  lines  of  consumption.  Or,  if 
the  demand  for  the  commodity  in  question  is  relatively  inelastic,  a 
diminution  in  its  price  may  increase  the  demand  for  other  things. 
But  there  are,  on  the  other  hand,  price  fluctuations  which  are  wide- 
spread and  fairly  uniform,  and  these  we  call,  with  substantial 
accuracy,  changes  in  the  value  of  money. 

We  have  already  discussed  the  nature  of  price  fluctuations  due 


276  OUTLINES   OF  ECONOMICS 

to  the  use  of  a  discounted  medium  of  exchange,  like  the  greenbacks, 
as  well  as  the  temporary  fluctuations  in  values,  —  especially  capital 
values,  —  that  spring  from  alternating  periods  of  prosperity  and 
depression  in  business.  But  what  are  the  underlying  causes  of 
general  changes  in  the  value  of  money  ?  —  the  kind  of  changes  we 
referred  to  when  we  mentioned  the  decreasing  value  of  the  mone- 
tary standard  itself  as  a  stimulus  to  business  enterprises  ? 

Leaving  theory  aside,  we  know  from  experience  that,  other 
things  being  equal,  the  value  of  money  will  decrease  when  the 
supply  of  the  standard  commodity  increases  rapidly.1  We  know 
that  the  value  of  money  units  sometimes  increases  when  the  world's 
supply  of  the  standard  metal  is  being  increased  only  slowly.  We 
then  say,  and  it  is  only  a  reasonable  inference,  that  the  value  of 
money  depends,  other  things  being  equal,  on  the  supply  and 
demand  of  the  standard  commodity.  But  this  is  only  an  empirical 
generalization.  It  leaves  us  ignorant  of  the  way  in  which  a  value 
equilibrium  is  really  struck  between  a  certain  amount  of  gold  and  a 
certain  amount  of  another  commodity. 

In  analyzing  the  relation  of  the  supply  and  demand  of  other  com- 
modities to  their  prices,  we  assumed,  for  simplicity  of  the  analysis, 
that  the  value  of  gold  was  not  changing.  That  is,  we  assumed  that 
the  general  level  of  prices  was  not  changing,  and  so  really  limited 
our  analysis  to  the  way  in  which  the  values  of  all  commodities 
except  gold  vary  as  compared  with  one  another. 

The  marginal  utility  analysis,  which  formed  the  basis  of  our  ex- 
planation of  the  shifting  of  demand  from  one  commodity  to  another, 
does  not  help  us  to  explain  the  demand  for  gold  as  money.  Mar- 
ginal utility  springs  from  the  capacity  of  things  to  satisfy  individual 
wants,  and  money  does  not  directly  satisfy  a  single  human  want, 
except  the  abnormal  wants  of  the  miser.  The  subjective  values  we 
set  upon  money  units  are  only  the  reflected  values  of  the  things 
that  money  will  buy  for  us.2 

Our  standard  money  commodity  is,  however,  a  commodity  that 

1  We  refer  here  to  a  more  permanent  and  thoroughgoing  change  in  the  prices 
than  that  resulting  from  the  business  expansion  following  an  increase  in  the  supply 
of  money  available  for  bank  reserves. 

2  When  we  speak  of  the  utility  of  money  we  use  the  word  "utility"  in  the  sense 
of  usefulness,  rather  than  of  want-satisfying  capacity. 


PROBLEMS   IN   MONEY  AND   BANKING 


277 


has  other  than  monetary  uses.  Gold  ornaments  and  other  articles 
made  from  gold  are  subject  to  the  law  of  diminishing  utility  just  as 
other  things  are.  From  the  estimates  of  the  director  of  the  mint, 
it  appears  that  in  recent  years  from  one  fourth  to  one  third  of  the 
world's  annual  production  of  gold  finds  its  way  into  industrial  uses. 
The  United  States  mints  and  assay  offices  refine  nearly  all  the  crude 
gold  bullion  produced  in  or  brought  to  this  country,  and  allow  the 
depositor  to  take  the  proceeds  in  money  or  in  bars  of  gold  for  indus- 
trial use,  as  he  prefers.  There  is  thus  a  constant  balancing  between 
the  industrial  and  monetary  uses  of  gold. 

In  effect  the  monetary  units  which  can  be  got  by  the  sale  of  gold 
jewelry,  etc.,  for  money  are  balanced  against  the  monetary  units 
which  can  be  got  by  the  simple  conversion  of  bullion  into  coin.1 
Consumers,  on  the  one  hand,  are  balancing  the  marginal  utility  of 
gold  jewelry,  etc.,  against  the  marginal  utility  of  other  things  that 
they  can  buy  with  the  same  number  of  money  units.  Producers, 
on  the  other  hand,  are  balancing  the  relative  profitableness  of  pro- 
ducing articles  made  from  gold  and  articles  made  from  other 
materials.  The  valuations  placed  on  gold  in  its  industrial  uses, 
where  a  direct  comparison  with  the  values  of  other  commodities  is 
possible,  in  this  way  fix  a  standard  to  which  the  value  of  gold  as 
money  must  approximate. 

There  is  another  way  in  which  society  makes  direct  comparisons 
between  the  value  of  gold  and  the  value  of  other  things.  Mining, 
like  agriculture,  is  subject  to  the  law  of  increasing  expenses,  and 
the  tendencies  of  prices  to  equal  marginal  expenses  is  true  for  both 
industries.  Not  only  are  there  marginal  mines,  mines  which  it  just 
pays  to  operate,  but  in  the  most  productive  mines  there  are  mar- 
gins, —  certain  depths,  for  example,  beyond  which  the  expense  of 
mining  more  than  eats  up  the  value  of  the  product.  Through  the 
operators  of  mines,  society  is  continually  comparing  the  values  of 
the  labor  and  the  capital  goods  used  up  in  the  production  of  gold 
with  the  value  of  the  things  that  can  be  bought  with  the  produced 
gold.  If  the  gold  produced  at  the  margin  will  purchase  things 
which  consumers  value  less  than  they  value  other  things  which 

1  The  expense  of  transforming  bullion  into  jewelry,  etc.,  is  left  out  of  account, 
as  it  does  not  affect  the  real  point  under  consideration. 


278  OUTLINES   OF   ECONOMICS 

could  have  been  produced  with  the  use  of  the  same  amount  of  capi- 
tal and  labor,  capital  and  labor  will  gradually  be  shifted  from  its 
marginal  use  in  gold  mining  to  the  production  of  other  things. 
Here,  then,  as  in  the  case  of  the  balancing  between  the  monetary 
and  industrial  uses  of  gold,  we  have  a  comparative  valuation  of 
gold  and  other  things. 

Several  years  ago  the  Bureau  of  the  Mint  undertook  an  investi- 
gation into  the  relation  of  the  expense  of  gold  mining  to  the 
amount  of  gold  produced.  Some  of  the  conclusions  reached  are 
worth  quoting  in  this  connection :  — 

In  every  mining  district  there  are  mines  producing  at  good  profits,  mines 
producing  at  small  profits,  mines  barely  paying  expenses,  and  mines 
operated  at  a  loss,  but  with  the  hope  that  they  will  do  better.  Every  increase 
in  costs  would  submerge  the  latter  more  deeply,  add  to  the  list  of  the  un- 
profitable, and  probably  close  some  of  them.  ...  A  higher  scale  of  working 
costs  will  bring  losing  experiments  to  an  earlier  conclusion,  reduce  profits, 
and  make  mining  ventures  generally  less  attractive,  and  thus  diminish  the 
output.1 

To  summarize  our  conclusions:  The  law  of  marginal  utility  ap- 
plies in  the  industrial  uses  of  gold.  The  particular  form  of  the  law 
of  normal  value  that  is  operative  in  agriculture  also  holds  true  in 
gold  mining  (although  it  has  to  be  stated  in  a  somewhat  different 
way.)  An  increase  in  the  supply  of  gold  diminishes  its  marginal 
utility  in  industrial  uses,  that  is,  diminishes  the  valuation  put  on 
gold  as  compared  with  other  commodities.  This  is  bound  to  affect 
the  value  of  gold  as  money,  on  account  of  the  ease  with  which  the 
supply  of  gold  can  be  shifted  to  one  use  or  the  other.  The  resulting 
increase  in  prices  may  be  slow  and  irregular,  but  it  is  none  the  less 
certain.  The  rise  of  prices,  however,  cannot  continue  indefinitely. 
The  increase  of  prices  and  wages  brings  increasing  expenses  in 
gold  mining.  The  marginal  part  of  the  supply  of  gold  will  nor- 
mally be  cut  off,  —  a  process  which  will  continue  until  a  rise  in  the 
value  of  gold  diminishes  the  expense  of  producing  it. 

These  suggestions  are  not  put  forward  as  an  exhaustive  state- 
ment of  all  the  relations  between  the  supply  of  gold  and  its  value, 
although  they  are  possibly  the  most  important  ones.  Increases  in 

1  Report  on  the  Production  of  the  Precious  Metals,*  1904,  p.  41. 


PROBLEMS    IN   MONEY   AND   BANKING 


279 


the  quantity  of  other  kinds  of  money  and  improvements  in  the 
mechanism  of  credit,  for  example,  probably  have  an  effect  on  prices 
similar  to  that  of  an  increase  in  the  quantity  of  gold,  in  that  they 
economize  the  use  of  that  metal.  Silver  and  paper  money  do  not 

TABLE  I 
PRODUCTION  OF  GOLD  IN  THE  WORLD  SINCE  1841 

(From  1841  to  1885  the  estimate  is  from  a  table  of  averages  for  certain  periods,  compiled 
by  Dr.  Adolph  Soetbeer;  for  the  years  1886  to  1006  the  production  is  the  annual  estimate  of 
the  Bureau  of  the  Mint.) 


PERIOD 

ANNUAL  AVERAGE  FOR  PERIOD 

FINE  OUNCES 

VALUE 

1841-1850 

1,760,502 

$36>393>000 

1851-1855 

6,410,324 

132,513,000 

1856-1860 

6,486,262 

134,083,000 

1861-1865 

5.949.582 

122,989,000 

1866-1870 

6,270,086 

129,614,000 

1871-1875 

5,591,014 

115,577,000 

1876-1880 

5.543."° 

114,586,000 

1881-1885 

4,794,755 

99,116,000 

1886-1890 

5,461,282 

112,895,000 

1891-1895 

7,882,565 

162,947,000 

1896-1900 

12,446,939 

257,301,100 

1901 

12,625,527 

260,992,900 

1902 

i4,354,68o 

296,737,600 

1903 

15,852,620 

327,702,700 

1904 

16,804,372 

347,377,200 

I90S 

18,268,696 

377,647,  7°° 

1906 

i9,366.55° 

400,342,100 

take  the  place  of  an  equivalent  amount  of  gold,  however,  because 
some  gold  has  to  be  held  in  reserve  to  maintain  their  convertibility. 

The  so-called  "quantity  theory"  of  the  value  of  gold  money  has  been 
much  discussed  in  recent  years.  This  is  the  doctrine  that,  other  things  being 
equal,  prices  vary  inversely  as  the  amount  of  money  in  circulation.  In 
reality  many  different  theories  of  the  value  of  money  have  been  put  forward 
under  the  name  of  the  quantity  theory.  The  theory  just  outlined,  for 
example,  may  be  called  a  conservative  form  of  the  quantity  theory.  Some 
statements  of  the  theory  are  open  to  objection  because  they  (i)  place  too 


280 


OUTLINES    OF   ECONOMICS 


much  stress  on  the  very  doubtful  problem  of  the  exact  mathematical  ratio 
between  variations  in  the  quantity  of  money  and  variations  in  prices,  or 
(2)  confuse  the  "measure"  or  "denominator"  of  value  with  the  standard  of 
value,  or  (3)  fail  to  recognize  the  necessity  of  a  commodity  standard  of  value, 
and  consequently  attach  no  significance  to  the  influence  of  the  industrial 
use  of  the  standard  commodity  on  its  value.  The  most  extreme  form  of 
the  quantity  theory  is  that  which  forms  the  foundation  of  the  argument 
for  the  possibility  of  fiat  money. 

The  Increase  in  the  Production  of  Gold.  —  Although  probably 
more  gold  was  produced  between  1850  and  1875  than  from  1492  to 
1850,  yet,  as  Table  I  shows,  the  production  of  gold  in  any  three 

TABLE  II 

RECENT  PRODUCTION  OF  GOLD  IN  DIFFERENT  COUNTRIES  l 
(In  thousands  of  kilograms) 


COUNTRY 

1897 

IQOO 

1904 

Africa  

88 

I  7. 

1  20 

Australia  

07 

Ill 

132 

United  States  and  Alaska  

86 

no 

121 

Russia  

3=; 

7T 

77 

Canada  

42 

2C 

British  India  

12 

18 

Mexico  

II 

17 

10 

China  

8 

7 

All  others  

26 

7.C 

7C 

Total  .  .          

2CC 

^s? 

Ml 

1  From  Journal  of  Political  Economy,  Vol.  X,  p.  580,  and  Finance  Report,  1007,  p.  363. 

years  since  1896  or  in  any  two  years  since  1902  was  as  great  as  the 
total  production  in  the  period  first  mentioned.  Most  of  this  great 
output  of  gold,  as  Table  II  indicates,  comes  from  relatively  few 
countries.  At  present  the  British  empire  supplies  over  one  half 
and  the  United  States  (including  Alaska)  nearly  one  fourth  of  the 
total  product.  The  causes  of  this  enormous  increase  were,  in  part, 
the  opening  up  of  new  gold  fields  in  South  Africa,  Canada,  Alaska, 
and  Colorado,  and  in  part  the  improvements  in  methods  of  extract- 
ing gold  from  low  grade  and  refractory  ores,  in  which  connection 


PROBLEMS   IN   MONEY   AND   BANKING 


28l 


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282  OUTLINES    OF   ECONOMICS 

the  development  of  the  "cyanide  process"  has  been  of  special  im- 
portance.1 Dredging  for  gold  in  the  beds  of  rivers  which  drain 
gold-yielding  lands,  is  a  very  recent  development  that  promises  to 
be  of  considerable  importance.  Notwithstanding  the  decrease  in 
the  value  of  gold,  the  bulk  of  the  gold  produced  in  California  to-day 
is  from  ore  bodies  that  twenty- five  or  thirty  years  ago  were  generally 
considered  worthless. 

The  effects  of  this  enormous  output  have  been  felt  in  both  Europe 
and  America  in  a  general  increase  of  both  prices  and  wages.  There 
are  some  who  expect  that  the  value  of  gold  will  continue  to  depreci- 
ate for  a  long  time  in  the  future.  Account  must  be  taken,  however, 
of  the  automatic  check  which  the  increase  in  wages  and  prices  is 
bound  to  put  on  the  production  of  gold  by  increasing  mining  ex- 
penses. On  the  other  hand,  still  further  economies  in  productive 
methods  are  possible. 

QUESTIONS  AND  EXERCISES 

1.  Report  on  the  Note  Issue  systems  of  Canadian  banks,  the  Bank 
of  England,  the  Bank  of  France,  and  the  Imperial  Bank  of  Germany. 

2.  Make  a  diagram  showing  the  weekly  changes  in  the  total  reserves 
and  the  surplus  reserves  of  New  York  clearing  house  banks  for  any  recent 
year.     (Statistics  may  be  obtained  from  the  annual  Financial  Review,  the 
Commercial  and  Financial  Chronicle,  the  Banker's  Magazine,  or  other  finan- 
cial journal.) 

3.  Construct  a  simple  index  number  for  wholesale  prices,  in  one  city, 
covering  the  period  of  a  few  weeks.     (Use  the  market  quotations  of  a  daily 
paper  as  data.) 

4.  If  half  the  gold  in  the  world  were  destroyed,  would  prices  be  doubled  ? 

REFERENCES 

(See  also  references  for  Chap.  XV.) 

ADAMS,  T.  S.     "Index  Numbers  and  the  Standard  of  Value,"  Journal  of 
Political  Economy,  December,  1901,  March,  1902. 

1  "There  are  many  mines  in  operation  now  at  a  profit  which  could  not  have  been 
worked  at  a  profit  ten  years  ago.  There  has  been  an  important  addition  to  the 
gold  and  silver  product  by  the  recovery  of  these  metals  from  lead  and  copper  ores 
by  modern  processes.  The  most  important  gains  seem  to  have  come,  however, 
through  economies  in  management,  particularly  by  enlarging  the  scale  of  opera- 
tions and  by  more  complete  extraction  of  the  values  from  the  ores  treated."  — 
Report  on  the  Production  of  the  Precious  Metals,  1904,  p.  41. 


PROBLEMS   IN   MONEY  AND   BANKING  283 

BURTON,  T.  E.     Crises  and  Depressions. 

BOWLEY,  A.  L.     Statistics,  Chap.  VII. 

Director  of  the  Mint.     Annual  Report  on  the  Production  of  the  Precious 

Metals. 

JONES,  E.  D.     Economic  Crises. 
MAYO-SMITH,  Statistics  and  Economics. 
United  States  Geological  Survey,  annual  volume  on  the  Mineral  Industry. 


CHAPTER    XVII 
INTERNATIONAL   TRADE 

THE  subject  of  international  trade  brings  us  to  an  examination 
of  exchange  from  a  new  viewpoint.  In  principle,  international 
trade  does  not  differ  essentially  from  other  kinds  of  trade.  In  the 
last  analysis  it  amounts  to  an  aggregate  of  exchanges  between  pairs 
of  traders.  But  in  discussing  international  trade  we  lay  the  em- 
phasis upon  the  aggregate  rather  than  the  specific  exchange,  take 
a  larger  view  of  commercial  relations,  try  to  determine  how  great 
districts  of  the  world  combine  to  supply  one  another's  wants,  and 
analyze  the  machinery  by  which  commerce  overcomes  the  obsta- 
cles of  trade  restrictions  and  the  difficulties  growing  out  of  the  use 
of  different  monetary  units  in  different  parts  of  the  world.  Much 
of  the  confusion  met  with  in  this  branch  of  economic  thought  is 
due  to  mere  forgetfulness  of  the  elementary  axioms  of  exchange, 
and  for  this  reason  it  is  desirable,  even  at  the  cost  of  some  repe- 
tition, to  reexamine  briefly  the  nature  and  function  of  trade. 

Nature  and  Advantage  of  International  Trade.  — The  function 
of  trade  is  to  create  the  utilities  of  time  and  place.  Industry 
itself,  "  production  "  in  the  narrow  sense  of  the  word,  is  like- 
wise confined  to  the  creation  of  utilities  —  form  utilities,  prin- 
cipally. Trade,  therefore,  is  as  beneficial,  as  truly  productive,  as 
agriculture  or  manufactures.  The  American  people  are  just  as 
truly  engaged  in  production  when  they  buy  books  from  Germany 
as  when  they  cut  down  their  own  spruce  trees  and  manufacture 
them  into  paper  for  the  "yellow  journals." 

Trade  is  not  only  productive  in  the  sense  that  it  creates  utilities, 
but  it  is  also  an  indispensable  part  or  process  of  the  division  of 
labor.  Upon  this  self-evident  fact  it  is  unnecessary  to  dwell.  It 
is,  however,  desirable  to  recall  the  fact  that  specialization  of  func- 

284 


INTERNATIONAL   TRADE  285 

tion  is  profitable  even  to  those  individuals  or  classes  which  are 
plainly  superior  in  general  productive  efficiency.  A  successful 
lawyer  does  not  write  his  own  letters,  even  though  he  is  an  expert 
operator  on  the  typewriter.  He  specializes  in  that  occupation  in 
which  he  has  the  greatest  advantage,  and  hires  some  one  to 
write  his  letters  for  him. 

This  rule  —  frequently  referred  to  as  the  law  of  comparative  costs 
-  holds  for  communities  and  nations,  as  well  as  for  individuals. 
If,  in  Holland,  it  costs  ten  times  as  much  to  produce  a  barrel  of 
flour  as  a  yard  of  cloth,  while  in  America  it  costs  only  six  times  as 
much,  it  will  be  profitable  for  the  Dutch  to  confine  themselves  to 
the  production  of  cloth,  and  for  the  Americans  to  confine  themselves 
to  the  production  of  flour;  even  though  both  flour  and  cloth  could 
be  produced  more  cheaply  in  America  than  in  Holland.  * 

If  this  conclusion  is  true,  it  follows  that  so  long  as  the  compara- 
tive costs  of  producing  goods  vary  among  the  different  nations  of 
the  world,  so  long  there  will  be  some  international  trade.  And, 
furthermore,  since  it  is  impossible  to  conceive  that  the  costs  of 
producing  all  kinds  of  transportable  goods  will  ever  be  exactly 
proportional  in  the  several  countries  of  the  world,  it  is  evident  that 
international  trading  is  bound  to  continue.  It  can  be  permanently 
suppressed  only  by  raising  freight  charges  to  a  prohibitive  level, 
or  by  deliberately  manipulating  customs  tariffs  so  as  to  suppress 
every  new  international  trade  connection  as  soon  as  it  springs  up, 
or  by  the  complete  destruction  of  industry  in  other  parts  of  the 
world;  and  none  of  these  possibilities  is  ever  likely  to  be  realized. 
The  ideal  of  an  exclusive  home  market  is  a  delusion.  The  last 
thirty  years  have  witnessed  a  remarkable  increase  of  protection 
throughout  the  civilized  world,  but  international  trade  has  in- 
creased by  leaps  and  bounds. 

International  trade,  then,  is  productive,  profitable,  and  for  prac- 
tical purposes  irrepressible.  The  tariff  controversy  can  never  be 
settled  until  these  elementary  truths  are  thoroughly  appreciated. 
On  the  other  hand,  it  is  equally  plain  that  these  facts  do  not  settle 
the  tariff  controversy.  Ordinarily,  trade  is  mutually  advantageous 

1  Assuming,  as  Mill  points  out,  that  capital  and  labor  will  not  emigrate 
tn  masse  from  Holland  to  America,  and  that  freight  charges  are  small. 


286  OUTLINES   OF  ECONOMICS 

to  both  parties;  and  in  one  sense  it  is  always  so.  If  Smith  trades 
x  to  Jones  for  y,  Smith  must  have  wanted  y  more  than  x,  and 
Jones  must  have  wanted  x  more  than  y,  so  that  the  temporary 
happiness  of  both  is  increased  by  the  transaction.  But  this  is  not, 
as  has  sometimes  been  intimated,  sufficient  reason  for  permitting 
all  kinds  of  trade  and  condemning  all  kinds  of  trade  restrictions. 
If  Smith  is  an  ignorant  Indian,  x  a  blue  fox  pelt,  Jones  an  un- 
scrupulous trader,  and  y  a  pint  bottle  of  adulterated  whisky,  the 
"  sense  "  in  which  this  trade  is  adjudged  "  mutually  profitable  " 
is  scarcely  distinguishable  from  nonsense.  The  logic  which  ap- 
proves unrestricted  trading  of  this  sort  would  also  sanction  unre- 
stricted child  labor  and  the  contemptible  extortion  of  the  "  loan 
shark  "  who  charges  a  desperate  widow  200  per  cent  a  year  on  a 
small  loan  which  the  woman  in  her  ignorance  and  necessity 
must  secure.  Trade  restrictions  have  existed  as  long  as 
international  trade  itself,  and  the  real  problem  is  not  whether 
there  should  be  any  restriction,  but  when  and  where  particular 
varieties  of  restraint  are  justifiable. 

Restriction  of  International  Trade.  —  In  ancient  times  among 
many  nations,  such  as  the  Hebrews  and  Chinese,  contact  with  other 
peoples  was  feared  and  foreign  trade  was  practically  prohibited. 
In  Greece  and  Rome  the  greatest  thinkers  entertained  a  profound 
contempt  for  trade,  based  in  part  upon  the  belief  that  in  exchange 
one  party  is  usually  cheated;  and  this  prejudice  was  partially 
justified  by  the  character  of  the  primitive  trader  who  was  part 
sailor,  part  pirate,  part  merchant,  and  took  all  the  profit  he  could 
possibly  extort  in  every  transaction  as  insurance  against  the  great 
risks  of  his  calling. 

At  a  later  date,  in  the  middle  ages,  when  commerce  between 
the  semi-L  dependent  cities  of  western  Europe  increased,  trade 
came  to  be  highly  prized  by  the  average  citizen,  although  it  was 
still  condemned  by  the  philosophic  schoolmen;  and  it  was  regu- 
lated in  the  most  exclusive  spirit. 

"  Every  effort  was  made  to  keep  trade  as  much  as  possible  in  the  hands 
of  native  citizens.  For  example,  the  Venetians  forbade  the  Germans  from  en- 
gaging in  trade  with  the  East  by  way  of  Venice,  and  the  citizens  of  Lubeck  strove 
to  keep  the  Baltic  trade  from  the  Dutch.  .  .  .  Foreigners  were  mistrusted 


INTERNATIONAL  TRADE  287 

and  partnerships  with  them  were  forbidden.  Foreign  visitors  were  restricted 
in  many  ways  in  their  commercial  dealings  with  native  citizens.  Many 
occupations  were  closed  to  them ;  the  length  of  their  sojourn  and  the  number 
of  their  visits  were  limited;  they  could  not  pass  a  town  without  exposing  their 
wares  for  sale  and  paying  the  required  market  dues.  The  wants  of  the  con- 
sumer took  precedence  over  those  of  the  producer  or  merchant.  At  the 
weekly  markets  consumers  could  supply  their  needs  before  the  baker  or  mer- 
chant was  allowed  to  make  purchases.  There  was  a  community  interest 
in  the  supplies  of  necessities,  and  often  their  exportation  was  prohibited.  The 
trade  of  neighboring  peasants  was  restricted  to  the  home  city,  and  laws 
regulating  price,  weight,  measure,  and  quality  were  common.  This  restrict- 
ive municipal  policy  was  very  much  relaxed  at  the  great  fairs  which  were 
held  periodically  in  various  parts  of  Europe."  l 

In  the  early  modern  period  mercantilism  became  dominant. 
Commercial  policies  were  controlled  by  the  desire  to  get  and  keep 
the  precious  metals.  At  first  the  exportation  of  specie  was  pro- 
hibited; merchants  trading  abroad  were  compelled  to  bring  home 
cash  for  the  goods  they  had  taken  out  with  them;  foreign  mer- 
chants trading  within  the  home  country  were  compelled  to 
exchange  their  cash  for  domestic  goods  before  they  departed; 
exportation  —  except  the  exportation  of  raw  materials  needed 
in  the  manufacturing  industries  —  was  encouraged;  and  impor- 
tation —  except  in  the  case  of  the  precious  metals  and  skilled 
artizans  who  were  encouraged  to  immigrate  —  was  discouraged 
or  prohibited.  When  it  became  apparent  that  the  supply  of 
money  had  to  be  secured  through  international  trading,  the 
greatest  emphasis  came  to  be  laid  upon  the  "  favorable  balance 
of  trade  ";  and  means,  ranging  all  the  way  from  bounties  to 
war,  were  vigorously  employed  to  secure  the  carrying  trade  for 
native  ships.  In  a  large  historical  sense  mercantilism  was  merely 
a  cry  elicited  by  one  of  the  sharpest  of  the  world's  great  growing 
pains.  It  was  a  symptom  more  than  a  cause  or  an  explanation. 
It  marked  the  establishment  of  the  division  of  labor  on  a  territorial 
basis,  and  recorded  the  replacement  of  the  independent  economy 
of  the  middle  ages  by  the  modern  economy  of  exchange.  For 
the  latter,  money  was  indispensable,  and  had  to  be  secured  at  any 
cost. 


1  Professor  G.  M.  Fisk,  International  Commercial  Policies,  pp.  15-16. 


288  OUTLINES   OF  ECONOMICS 

The  mercantilist  period  has  been  followed  —  after  a  brief 
laissez-faire  reaction  in  some  countries  —  by  the  period  of  protec- 
tion in  which  we  still  linger.  The  extensive  taxation  of  imports 
still  continues;  but  trade  prohibitions,  export  and  transit  duties, 
have  been  largely  abandoned  in  the  more  advanced  countries.  In 
the  United  States  export  duties  are  prohibited  by  constitutional 
law.  But  few  nations  have  wholly  risen  above  mercantilist  prac- 
tices. Canada  prohibits  the  importation  of  oleomargarine  and 
similar  substitutes  for  butter ;  Great  Britain  prohibits  the  impor- 
tation of  sugar  from  countries  paying  bounties  on  its  production; 
Switzerland  levies  an  export  tax  on  cattle,  hides,  and  skins  shipped 
from  the  country,  while  Norway  and  Sweden  tax  the  exportation 
of  timber ;  and  Russia  still  attempts  to  control  the  Persian  trade 
by  levying  transit  duties  upon  goods  passing  through  her  terri- 
tories destined  for  Persia.  But  export  and  transit  duties  in  their 
old  mercantilist  uses  have  nearly  disappeared. 

Extensive  use  is  still  made  of  export  taxes  for  revenue  purposes  in  South 
America  and  the  Orient;  and  trade  prohibitions  based  upon  grounds  of 
sanitation,  morals,  and  what  Americans  call  the  "police  powers,"  are  in- 
creasing rather  than  decreasing.  Turkey,  for  instance,  levies  an  ad  valorem 
tax  of  i  per  cent  upon  all  exports;  and  in  general  the  most  important 
tropical  products  are  still  subject  to  export  taxes.  As  for  trade  prohibitions 
the  continued  necessity  for  their  occasional  employment  is  illustrated  by  our 
federal  law  authorizing  the  President  to  suspend  the  importation  of  any 
article  which  he  regards  as  "  dangerous  to  the  health  or  welfare  of  the  people 
of  the  United  States."  For  a  more  complete  enumeration  of  modern  export 
duties  and  trade  prohibitions,  see  Fisk's  International  Commercial  Policies,, 
Chap.  VI. 

Mercantilist  ideas  die  hard,  and  current  discussion  of  inter- 
national trade  by  reputable  legislators  and  intelligent  journalists 
is  still  permeated  with  fallacious  notions  which  had  their  origin  in 
the  conditions  and  economic  philosophy  of  the  seventeenth  century. 
One  of  these  notions,  the  idea  that  there  is  something  essentially 
favorable  in  an  excess  of  exports,  and  something  essentially  un- 
favorable in  an  excess  of  imports,  demands  careful  consideration. 

Balance  of  Trade.  —  Suppose,  for  purposes  of  discussion,  that 
the  United  States  succeeded  in  prohibiting  imports  for  a  long 
period,  while  at  the  same  time  it  succeeded  in  selling  a  large 


INTERNATIONAL   TRADE  289 

amount  of  merchandise  to  foreign  purchasers.  What  would 
happen?  Evidently  a  large  portion  of  the  money  of  the  world 
would  accumulate  in  the  vaults  of  American  bankers,  interest 
rates  would  fall,  —  possibly  to  rise  again  later,  —  and  eventually, 
if  the  process  continued  long  enough,  the  prices  of  American  com- 
modities would  ascend  to  such  a  level  that  foreign  nations  would 
be  unable  to  continue  buying  in  this  country.  At  this  point, 
evidently,  our  hypothesis  breaks  down,  and  we  are  forced  to  con- 
clude that  the  original  supposition  was  an  impossible  one. 

This  hypothetical  case  and  its  reductio  ad  absurdum  are  sufficient 
to  establish  certain  important  practical  conclusions.  The  first  is 
that  a  country  cannot  permanently  sell  goods  for  money  alone. 
If  it  produces  large  quantities  of  the  money  metals,  it  will  regu- 
larly sell  those  metals  for  the  goods  and  services  of  other  nations. 
If  it  produces  no  gold  or  silver  itself,  it  will  secure  them  through 
exchange;  although,  even  in  this  case,  gold  and  silver  are  likely  to 
constitute  only  a  minor  part  of  its  imports.  Perhaps  the  gravest 
error  one  can  commit  in  studying  an  international  trafle  balance 
is  to  treat  it  as  an  exchange  of  goods  for  money.  It  is  not  even  an 
exchange  of  goods  for  goods.  The  true  international  balance  is 
one  of  claims  against  obligations,  of  credits  against  debits.  The 
complete  statement  is  that  the  goods,  moneys,  and  services  ren- 
dered by  one  country  to  other  countries,  plus  its  claims  and  credits 
of  all  kinds,  will  be  balanced  by  the  goods,  moneys,  and  services 
received  by  the  same  country  plus  its  debts  and  obligations  of  all 
kinds.  Or,  to  put  the  matter  concretely,  we  must  include,  along  with 
the  exports  and  imports  of  merchandise  and  bullion,  loans  which 
the  country  makes  or  receives,  annual  interest  payments  on  loans 
and  capital  invested  abroad,  repayment  of  loans  or  the  purchase 
of  securities,  earnings  of  ships,  insurance  premiums,  and  commis- 
sions of  all  kinds  for  international  services,  governmental  ex- 
penditures in  foreign  countries  for  diplomatic  service,  payment 
of  subsidies  and  war  indemnities,  remittances  of  immigrants, 
expenditures  of  travelers,  and  a  thousand  and  one  other  items, 
all  tending,  according  as  they  depress  or  raise  the  price  of  foreign 
exchange,  to  bring  about  the  importation  or  exportation  of  gold 
for  the  occasional  balancing  of  the  account. 


290  OUTLINES   OF  ECONOMICS 

A  mere  glance  at  this  list  of  items  entering  into  foreign  trade  is 
sufficient  to  puncture  the  old  mercantilist  idea  that  a  "favorable 
balance  of  trade  "  or  an  excess  of  merchandise  exports  brings  about 
an  increase  of  the  money  supply.  This  idea  is  as  fully  refuted  by 
commercial  statistics  as  by  economic  analysis.  In  the  thirty-three 
years,  1874-1906,  for  instance,  we  had  a  large  excess  of  merchan- 
dise exports  in  all  except  four  years,  but  there  was  an  excess  of 
gold  imports  in  only  sixteen  years.  So,  similarly,  there  is  no  neces- 
sary truth  in  the  statement  which  we  hear  so  often,  that  our  present 
"favorable  balance"  indicates  that  the  United  States  is  settling  its 
indebtedness  to  foreign  capitalists,  repurchasing  American  securi- 
ties owned  abroad,  and  thus  bringing  the  control  of  American 
enterprises  more  completely  into  the  hands  of  Americans.  It  may 
mean  this,  to  be  sure,  but  it  may  also  merely  mean  that  we  are 
paying  England  in  goods  for  carrying  and  insuring  our  exports, 
or  that  foreign  owners  of  American  securities  are  taking  in  this 
form  the  annual  interest  or  profits  due  to  them.  The  recent  excess 
of  export*  may  thus  represent  the  continuance  of  indebtedness 
rather  than  its  liquidation.  For  the  same  reasons  an  "unfavor- 
able balance  of  trade  "  or  an  excess  of  merchandise  imports  is  open 
to  a  variety  of  different  interpretations.  It  may  mean  that  foreign 
capital  is  investing  more  heavily  in  the  country  under  discussion, 
or  that  this  country  is  taking,  in  the  form  of  consumable  commodi- 
ties, interest  and  profits  on  investments  which  it  has  previously 
made  abroad,  or  that  it  is  selling  its  holdings  in  foreign  enterprises 
and  taking  the  proceeds  in  the  form  of  consumable  goods.  An 
"unfavorable  balance"  of  trade  may  thus  be,  in  reality,  highly 
encouraging;  and  a  "favorable  balance"  indicative  of  national 
waste  and  extravagance.  The  precise  meaning  of  any  particular 
balance  can  only  be  determined  after  the  most  careful  study,  and 
no  dependence  should  be  placed  upon  the  offhand  interpretations 
of  casual  investigators.  The  great  truth  is  that  there  must  be 
some  sort  of  balance  between  the  credits  and  liabilities  of  any 
country,  and  that  in  practice  a  nation  must  be  willing  to  buy  if  it 
is  anxious  to  sell. 

A  scholarly  analysis  of  the  foreign  trade  of  the  United  States,  with  a  careful 
interpretation  of  the  meaning  of  the  trade  balance  at  various  periods,  may 


INTERNATIONAL  TRADE 


291 


be  found  in  the  North  American  Review  for  July,  1901,  from  the  pen  of 
Professor  C.  J.  Bullock.  Professor  Bullock's  explanation  of  the  balance  in 
two  or  three  periods  may  be  given,  in  order  to  illustrate  the  variety  of  factors 
which  must  be  taken  into  account  when  dealing  with  this  subject.  In  the 
period  1789-1820  the  imports  of  merchandise  and  specie  exceeded  the  cor- 
responding exports  by  $511,000,000,  and  our  obligations  were  further  in- 
creased by  interest  on  foreign  capital  invested  in  the  United  States  to  the 
amount  of  $200,000,000  approximately.  This  total  indebtedness  of  some- 
thing over  $700,000,000  was  offset  by  the  earnings  of  the  American  mer- 
chant marine,  estimated  at  about  $800,000,000  for  the  period  in  question. 
"  So  far,  then,  from  the  country  being  drained  of  its  money  in  payment  for 
the  balance  of  imported  merchandise,  the  banks  held  not  less  than  $20,000,- 
ooo  of  specie  in  the  year  1820;  while  Gallatin  and  Crawford  estimated  that 
there  had  never  been  more  hard  cash  in  circulation." 

In  the  decade  1831-1840,  owing  to  the  high  prices  current  in  this  country, 
imports  exceeded  exports  by  $159,700,000;  the  imports  of  specie  also  ex- 
ceeded the  exports  by  $50,650,000 ;  and  the  earnings  of  our  merchant  marine, 
$90,000,000,  sufficed  only  to  reduce  this  "unfavorable  balance"  to  about 
$120,000,000.  This  remaining  balance  is  accounted  for  by  new  foreign 
investments  in  the  United  States,  in  particular  by  foreign  purchases  of  state 
bonds.  "Our  large  imports  of  merchandise  and  specie  had  been  made 
necessary  by  the  movement  of  foreign  capital  toward  the  United  States." 

In  the  decade  1851-1860  the  merchandise  imports  again  exceeded  the  ex- 
ports by  $355,800,000;  the  net  amount  due  to  foreign  creditors  was  some- 
where between  $100,000,000  and  $130,000,000;  and  to  offset  these  adverse 
balances  our  merchant  marine  earned  in  this  period  only  $158,000,000.  The 
remaining  balance  in  this  case  was  covered  by  our  large  excess  of  specie 
exports,  which  amounted  to  $417,608,000,  and  was  due  to  the  discovery  of 
gold  in  California.  "  The  United  States  had  become  one  of  the  leading  gold- 
producing  regions,  and  the  course  of  the  exchanges  was  inevitably  altered." 

In  the  periods  briefly  described  above,  the  striking  factors  in  our  inter- 
national trade  were,  respectively,  the  earnings  of  our  merchant  marine,  new 
investments  of  foreign  capital  in  the  United  States,  and  large  specie  exports 
following  the  discovery  of  gold  in  California.  In  the  last  period,  from  1874 
to  1896,  our  exports  both  of  merchandise  and  specie  greatly  exceeded  our 
imports.  "This  meant  simply,"  concludes  Professor  Bullock,  "that  the 
country  had  assumed  its  normal  position  as  a  debtor  nation  on  the  various 
items  of  invisible  exchanges,  and  was  paying  annually  something  like 
$122,500,000  on  such  accounts." 

In  concluding  this  aspect  of  the  subject  the  student  should  be  warned  that 
trade  statistics  are  full  of  pitfalls  for  the  unwary  and  can  safely  be  handled 
only  by  experts.  Exports  are  sometimes  overvalued,  imports  are  generally 
undervalued;  some  countries  state  values  at  the  point  of  departure  (thus 
excluding  cost  of  carriage)  ;  other  countries  state  values  at  the  point  of  entry 


292  OUTLINES   OF  ECONOMICS 

(thus  including  cost  of  carriage)  ;  some  countries  make  special  efforts  to  ex- 
clude values  of  re  exported  goods  from  their  statistics;  others  make  little 
or  no  effort  to  eliminate  such  nominal  items ;  while  the  complete  prevention 
of  such  reduplication  is  probably  impossible.  Eminent  statisticians  are  now 
making  earnest  effort  to  harmonize  the  trade  statistics  of  the  various  countries 
of  the  world,  but  it  will  be  a  long  time  before  trustworthy  conclusions  con- 
cerning the  real  significance  of  the  so-called  balance  of  trade  can  be  drawn 
by  the  average  student. 

Foreign  Exchange.  —  The  preceding  discussion  makes  it  clear 
that,  compared  to  the  enormous  values  of  the  goods  exchanged  in 
international  trade,  only  a  small  amount  of  money  is  used.  As 
in  domestic  trade,  purchase  is  set  against  sale,  debt  canceled  by 
credit,  and  money  employed  only  for  the  occasional  settlement  of 
balances.  This  cancellation  of  offsetting  claims  is  effected  by  the 
banks  and  brokers  who  engage  in  foreign  exchange;  and  a  brief 
description  of  their  economic  function  becomes  necessary  at  this 
point.  For  it  should  never  be  forgotten  that  the  international 
banker  has  been  in  the  past  and  will  be  in  the  future  an  indis- 
pensable factor  in  the  development  of  foreign  trade.  Without 
his  good  offices  the  vast  international  traffic  of  the  world  would  be 
but  a  shadow  of  what  it  now  is.  It  need  hardly  be  said,  more- 
over, that  in  its  detailed  operation  the  work  of  foreign  exchange 
is  exceedingly  complex,  and  that  only  a  sketch  of  the  essentials  of 
the  process  can  be  given  here. 

As  illustrative  of  the  process,  let  us  take  the  important  case  of 
our  trade  with  England.  Ordinarily,  an  American  exporter  who 
has  sold  goods  to  England  draws  an  order  —  a  bill  of  exchange  — 
on  the  English  debtor,  directing  him  to  pay  the  claim  at  some 
specified  time  and  place  in  London.  American  importers,  on  the 
other  hand,  commonly  pay  their  foreign  balances  by  buying  bills 
of  exchange,  or  drafts  on  London,  and  sending  them  to  their  Eng- 
lish creditors.  In  this  way  American  debts  and  credits  are  bal- 
anced in  London  without  transferring  any  money  at  all,  except 
occasionally  to  settle  the  balance  of  indebtedness. 

Bills  of  exchange  differ  from  ordinary  drafts  in  that  the  latter 
are  usually  drawn  on  a  bank,  while  the  bill  is  drawn  on  a  com- 
mercial creditor.  They  are  usually  accompanied  by  bills  of 
lading,  insurance  receipts,  certificates  of  weight  and  origin,  and 


INTERNATIONAL  TRADE 


293 


all  the  documents  necessary  to  give  the  purchaser  of  the  bill  full 
title  to  the  goods  until  the  bill  is  accepted  or  paid.  They  are 
accordingly  referred  to  as  "documentary  bills"  or  "commercial 
bills,"  to -distinguish  them  from  "bankers'  bills"  and  other  instru- 
ments of  international  credit  described  hereafter.  Documentary 
bills  are  freely  negotiable,  passing  from  hand  to  hand  by  indorse- 
ment, and  gathering  strength  with  each  new  indorsement.  It  is 
important,  also,  to  note  the  difference  between  "sight  bills"  and 
"long  bills,"  the  former  calling  for  payment  upon  presentation, 
the  latter  for  immediate  "acceptance"  by  the  drawee  and  payment 
after  thirty,  sixty,  or  ninety  days.  The  price  of  ninety-day  bills, 
for  instance,  is  fixed  by  the  price  of  sight  bills  and  the  discount 
rate  in  London. 

\Ve  may  now  enlarge  our  simplified  illustration  to  something 
like  life-size.  Documentary  bills  drawn  by  exporters  or  creditors 
all  over  the  country  are  sold  by  the  drawers  to  bankers,  usually 
New  York  bankers,  who  may  be  called  the  "wholesalers  of  ex- 
change." The  sale  may  be  either  direct  or  through  exchange 
brokers,  "the  jobbers  of  exchange."  These  documentary  bills 
are  sent  by  the  New  York  banks  to  their  foreign  correspondents  for 
collection  (in  the  case  of  sight  bills)  or  acceptance  (in  the  case 
of  long  bills).  The  balances  thus  built  up  abroad  by  the  New 
York  banks  constitute  the  fund  against  which  they  draw  their 
own  bills.  These  are  sold  directly  or  through  smaller  banks 
—  the  "retailers  of  exchange"  —  located  in  all  parts  of  the 
country.  Foreign  exchange  is  sold  ii\  a  great  variety  of  forms 
—  bankers'  drafts,  travelers'  checks,  travelers'  letters  of  credit, 
commercial  letters  of  credit,  cable  transfers,  and  the  like  — 
descriptions  of  which  may  be  found  in  the  references  cited  at  the 
end  of  the  chapter. 

The  illustrations  used  above,  while  typical  of  a  large  part  of  the 
foreign  exchange  of  this  country,  fail  to  represent  adequately  the 
complexity  which  marks  some  of  the  interactions  of  international 
credit.  An  illustration  of  the  more  complex  class  is  found  in  the 
"three-cornered"  or  "triangular  exchange."  We  import  from, 
very  much  more  than  we  export  to,  South  America.  A  part  of 
the  debit  balance  —  though  possibly  not  the  larger  part  at  the 


294  OUTLINES   OF  ECONOMICS 

present  time  —  is  settled  by  the  transmission  of  London  drafts  to 
our  South  American  creditors,  who  can  use  them  advantageously 
in  the  settlement  of  their  debts  in  Europe.  London  thus  "clears" 
for  the  world  as  New  York  "clears"  for  America  and  Paris  for 
France.  Just  as  the  net  balance  of  our  foreign  trade  is  struck  in 
New  York,  so  final  international  balances  are  cleared  or  settled 
in  London,  although  London's  preeminence  in  international  ex- 
change is  now  not  so  striking  as  it  has  been  in  the  past. 

The  question  next  arises  how  the  price  or  rate  of  exchange  is 
determined.  The  factors  controlling  the  price  or  rate  of  exchange 
are  as  numerous  and  as  difficult  to  trace  as  the  influences  which 
affect  the  price  of  any  economic  good  of  world-wide  bargain  and 
sale.  However,  to  facilitate  discussion,  we  may  classify  them  as: 
(a)  the  amount  of  pure  gold  in  the  monetary  units  which  are  to  be 
exchanged,  (6)  the  cost  of  shipping  gold,  and  (c)  "general  credit 
conditions." 

An  English  pound  sterling  contains  as  much  fine  gold  as  4.866 
American  dollars,  and  when  exactly  this  amount  must  be  paid  in 
New  York  for  a  draft  or  order  for  one  pound  payable  in  London, 
exchange  is  said  to  be  at  par.  Sterling  exchange  and  German 
exchange  are  usually  quoted  in  dollars  and  cents,  i.e.  the  amount 
of  American  money  required  to  buy  one  pound  or  four  marks 
respectively.  Consequently,  they  rise  or  become  dear  when  ex- 
change mounts  above  par.  French  exchange,  on  the  contrary, 
is  usually  quoted  in  francs,  the  number  of  francs  purchasable 
with  one  dollar;  and  it  is  consequently  cheap  when  above  par  and 
dear  when  below  par.  Exchange  between  the  United  States  and 
countries  with  silver  or  paper  standards  lack  the  steadying  in- 
fluence of  a  par  determined  by  the  actual  mass  of  fine  gold  in  the 
respective  standards  of  value,  and  hence  fluctuates  much  more 
than  exchange  between  countries  on  a  gold  basis.  In  order  to  be 
as  brief  and  clear  as  possible,  the  following  discussion  will  be  con- 
fined to  exchange  between  countries  on  a  gold  basis. 

Fluctuations  in  the  rate  of  exchange  depend  upon  the  "general 
credit  conditions  "  mentioned  above,  but  it  is  plain  that  upper  and 
lower  limits  to  these  variations  are  established  by  the  actual  cost 
of  shipping  gold.  Suppose,  for  a  moment,  that  it  costs  three  cents 


295 

to  transport  $4.866  worth  of  gold  bullion  between  New  York  and 
London.  Except  under  unusual  circumstances,  then,  sterling 
exchange  cannot  rise  above  $4.896,  nor  fall  below  $4.836.  These 
limits  are  frequently  spoken  of  as  the  "gold  points,"  "specie 
points,"  "shipping  points,"  or  "export  and  import  points";  and 
it  is  necessary  to  mention  them  because  of  their  frequent  employ- 
ment in  discussions  of  foreign  exchange.  But  they  are  usually 
defined  in  much  too  definite  terms.  The  cost  of  shipping  gold 
varies  with  the  size  of  the  shipment,  with  freight,  insurance,  and 
interest  rates,  and  in  some  degree  with  the  steamer  and  the  season 
of  the  year.  Furthermore,  gold  is  so  important  as  the  basis  of 
bank  credit  in  all  parts  of  the  world,  that  it  is  frequently  imported 
regardless  of  the  rate  of  exchange.  During  the  war  between 
Russia  and  Japan,  for  instance,  the  Bank  of  France  imported 
large  quantities  of  American  gold  in  this  semiarbitrary  way  in 
order  to  protect  reserves.  The  "gold  points,"  then,  while  in  one 
sense  very  real,  represent  extreme  limits  and  are  in  themselves 
variable. 

Within  these  extreme  limits  set  by  the  cost  of  shipping  gold, 
the  rate  of  exchange  varies  according  to  general  credit  conditions, 
i.e.  with  the  supply  of  and  demand  for  bills  of  exchange,  with 
interest  rates  here  and  abroad,  and  the  innumerable  forces  which 
influence  interest  rates.  Suppose,  for  instance,  that  our  imports 
of  merchandise  in  a  given  season  greatly  exceed  our  exports  of 
merchandise.  The  demand  for  bills  on  London  would  greatly 
exceed  the  supply  of  bills  against  London,  and  the  price  of  sterling 
exchange  would  rise  very  high  if  no  other  factors  were  involved. 
But  it  may  happen  at  the  same  time  that  interest  rates  in  New 
York  are  higher  than  in  London,  and  under  these  circumstances 
our  foreign  creditors  may  prefer  to  lend  their  balances  in  New 
York  in  order  to  earn  the  high  rate  of  interest  obtaining  there. 
The  placing  of  these  loans  in  New  York  will  in  turn  reduce  the 
demand  for  foreign  exchange,  and  thus  moderate  both  the  interest 
rate  and  the  rate  of  exchange. 

This  interaction  of  the  domestic  and  the  international  money 
markets  gives  rise  to  a  number  of  complex  transactions  which  can 
only  be  suggested  here.  In  discussing  the  sale  of  foreign  exchange 


296  OUTLINES   OF  ECONOMICS 

on  page  293  above,  American  bankers  were  described  as  drawing 
against  credit  balances  which  they  had  built  up  abroad.  Some 
bankers'  bills,  however,  the  so-called  "  finance  bills,"  are  drawn 
in  excess  of  the  foreign  balances,  and  thus  represent  borrowings 
abroad.  Finance  bills  are  used  (a)  to  tide  over  the  time  before  a 
plentiful  supply  of  documentary  bills  is  available;  and,  (ft)  to 
take  advantage  of  low  discount  rates  abroad,  e.g.  in  London,  by 
borrowing  in  London  and  lending  the  proceeds  in  New  York. 
Under  the  latter  circumstances,  finance  bills  payable  in  London 
at  sixty  or  ninety  days  are  sold  in  large  quantities  in  New  York, 
the  sellers  commonly  covering  their  risk  by  the  purchase  of  future 
drafts  calling  for  the  payment  of  the  same  amounts  in  London  at 
the  dates  when  the  bills  mature.  The  finance  bill  is  thus  one  of 
many  credit  instruments  used  to  bring  the  loanable  funds  of  the 
world  to  the  market  where  they  will  command  the  highest  rate  of 
interest;  and  it  is  hardly  necessary  to  add  that  it  assumes  at  times 
a  highly  speculative  character.  "  Bankers  sometimes  purchase 
outright  entire  new  issues  of  securities  from  corporations  with 
proceeds  obtained  by  the  issue  of  finance  bills,  sell  the  securities 
to  investors  during  the  currency  of  the  finance  bills,  and  apply  the 
proceeds  realized  through  the  sale  of  the  securities  to  the  payment 
of  the  bills  at  maturity."  1 

Regulation  of  the  Gold  Supply.  —  We  may  now  return  to  the 
general  topic  of  trade  regulation,  from  which  we  digressed  in 
order  to  consider  the  fundamental  principles  of  foreign  exchange. 
Historically,  it  will  be  remembered,  many  of  the  most  important 
restrictions  of  trade  have  had  as  their  object  the  regulation  of  the 
gold  supply.  And  the  movement  of  gold  is  still  of  great  interest 
to  the  world  of  high  finance  because  of  the  dependence  of  the 
volume  of  bank  credits  upon  the  gold  reserves  of  the  banks.  But 
the  preceding  discussion  would  seem  to  make  it  clear  that,  ordi- 
narily, there  is  little  that  the  government  can  do,  or  needs  to  do, 
in  the  way  of  regulating  the  supply  of  gold.  Through  interna- 
tional trade  and  foreign  exchange,  the  gold  supply  of  the  world 
is  automatically  distributed  among  the  countries  which  need  gold, 
in  accordance  with  the  intensity  of  their  respective  demands. 

1  Margraff,  International  Exchange,  p.  41. 


INTERNATIONAL  TRADE 


297 


In  ordinary  or  normal  times,  the  interest  rate  is  the  most  power- 
ful of  the  many  influences  which  control  the  distribution  of  the 
gold  supply.  International  banking  houses  keep  funds  in  both 
the  United  States  and  Europe,  and  they  are  constantly  shifting 
their  money  to  the  market  in  which  it  will  earn  the  highest  rate  of 
interest.  The  means  employed  to  move  their  funds  may  vary,  as 
has  been  explained,  all  the  way  from  the  simple  sale  of  foreign 
exchange  to  the  actual  importation  of  gold.  So  great  is  the  influ- 
ence exercised  by  the  rate  of  interest  over  the  gold  supply  that  the 
Bank  of  England  usually  finds  it  necessary  to  do  nothing  more 
than  raise  its  discount  rate  when  it  desires  to  attract  gold  to  Eng- 
land or  discourage  its  exportation. 

The  ordinary  price  level,  that  is,  of  merchandise,  also  exercises 
a  great  influence  upon  the  rate  of  exchange  and  the  movement  of 
gold.  When  prices  abroad  are  high  compared  with  American 
prices,  foreign  countries  increase  their  purchases,  the  supply  of 
American  bills  increases,  sterling  exchange  falls,  and  if  it  goes  low 
enough,  may  cause  the  shipment  of  gold  to  this  country.  Such  a 
condition  of  affairs,  for  instance,  is  likely  to  occur  in  the  autumn 
months,  when  large  exportations  of  American  cotton,  wheat,  and 
agricultural  products  create  a  plethora  of  bills  on  London,  and, 
other  things  being  equal,  depress  the  price  of  sterling  exchange. 

There  can  be  no  doubt,  then,  that  the  price  level  does  influence 
the  movement  of  gold.  Whether  the  gold  movement  influences 
prices,  however,  is  disputed.  Some  opponents  of  the  so-called 
"  quantity  theory  "  of  money  hold  that  it  does  not,  maintaining 
that  before  a  drain  of  gold,  for  instance,  could  raise  prices,  it 
would  so  elevate  the  interest  rate  that  the  drain  would  be  checked 
and  gold  be  brought  back.  In  their  view,  the  interest  rate  acts 
as  a  safety  valve,  through  whose  variations  any  protracted  gold 
movement  which  threatens  to  disturb  the  price  level  is  checked  and 
reversed  before  it  acquires  the  momentum  requisite  to  accom- 
plish the  larger  task.  Without  attempting  to  decide  the  question, 
we  may  be  sure  at  least  of  this  relevant  conclusion:  that  if  the 
movement  of  gold  continued  indefinitely,  prices  would  unques- 
tionably be  affected. 

The  gold  supply  thus  adjusts  itself  automatically  to  the  respec- 


298  OUTLINES    OF  ECONOMICS 

tive  demands  of  the  various  districts  of  the  world.  This  truth 
is  important  because  it  establishes  a  prima  facie  presumption 
against  laws  or  policies  which  interfere  with  the  normal  distri- 
bution of  the  precious  metals.  This  presumption  is  only  an  initial 
one,  however.  It  does  not  follow  that  "  artificial  "  interference 
with  the  distribution  of  the  gold  supply  is  never  warranted.  In 
times  of  war,  panic,  or  severe  financial  stringency,  extraordinary 
expedients  for  obtaining  gold  are  sometimes  used  which,  like  the 
heroic  remedies  employed  in  desperate  illness,  are  necessitated  by 
the  exigencies  of  the  situation.  In  the  undignified  scramble  for 
gold  which  often  attends  a  panic,  the  country  or  the  individual 
who  stands  aloof  and  waits  for  the  normal  laws  of  distribution  to 
bring  him  "  his  "  share  of  the  gold  supply,  may  have  cause  to 
regret  his  inaction.  Nevertheless,  it  is  true  that  such  expedients, 
like  strong  drugs,  are  to  be  used  with  the  greatest  caution.  They 
are  frequently  employed  when  the  situation  does  not  demand 
them,  their  use  tends  to  become  a  fixed  habit,  and  they  seldom 
accomplish  more  than  the  postponement  of  the  crisis. 

An  expedient  of  the  kind  described  was  employed  by  Mr. 
Shaw,  then  Secretary  of  the  Treasury,  in  the  spring  of  1906. 
The  following  critical  account  of  the  action  of  the  Secretary 
may  be  unjust  to  him,  for  it  must  be  remembered  that  the  financial 
stringency  of  the  time  threatened  to  become  dangerous;  but  it 
illustrates  in  a  striking  way  the  subtle  modern  devices  sometimes 
used  to  increase  the  supply  of  gold. 

"On  April  14  it  was  officially  announced  for  the  first  time,  that  the  Sec- 
retary would  allow  any  depositary  bank  which  engaged  to  import  gold  to 
anticipate  the  arrival  of  the  gold  by  withdrawing  a  like  amount  in  cash  from 
the  Treasury  upon  pledge  of  saving-bank  collateral  as  security.  The  sum 
so  withdrawn  was  to  be  regarded  as  a  temporary  loan,  and  to  be  returned  to 
the  Treasury  as  soon  as  the  gold  arrived.  In  providing  such  an  arrangement, 
Mr.  Shaw  virtually  reduced  the  cost  of  importing  gold  by  the  amount  of 
interest  during  transit,  and  raised  by  so  much  the  'gold  import  point.'  In 
other  words,  he  endeavored  to  make  it  profitable  for  the  depositary  bank, 
to  import  gold  without  waiting  for  sterling  exchange  to  fall  to  the  normal 
'gold  point.'  .  .  .  In  accomplishing  this,  Mr.  Shaw,  temporarily  eliminated, 
so  far  as  the  national  banks  were  concerned,  one  item  of  expense  in  their 
foreign  exchange  operations.  He  gave  them  an  advantage,  for  the  time  being, 
over  all  other  firms  engaged  in  the  same  business;  and  his  action  naturally 


INTERNATIONAL   TRADE 


299 


excited  criticism  among  the  private  bankers  who  found  themselves  discrimi- 
nated against.  Critics  also  attacked  his  method  of  announcing  his  decision. 
It  appeared  that  several  days  before  the  public  or  the  other  banks  were 
informed  of  his  intention,  Mr.  Shaw  had  seen  fit  to  make  private  arrangements 
with  two  New  York  banks  for  gold  imports  under  the  plan  .  .  .  Nor  was 
hostile  criticism  mitigated  by  the  general  publication  at  this  moment  of  the  fact, 
which  had  not  been  widely  known  before,  that  one  of  these  same  banks  had 
been  favored  by  the  Treasury  for  several  weeks,  and  possibly  months,  pre- 
ceding, with  virtually  the  same  privilege  under  a  different  guise.  This  had 
been  accomplished  by  allowing  the  bank  in  question  to  count  as  part  of  its 
reserve  its  importations  of  gold  during  their  period  of  transit  to  New  York. 
The  imported  gold  had  thus  been  made  practically  available  as  a  basis  for 
loans  from  the  moment  of  its  purchase  abroad,  and  the  item  of  time  cost  in 
such  imports  had  been  as  completely  eliminated  as  under  the  subsequently 
adopted  plan.  .  .  .  His  [Secretary  Shaw's]  statement  issued  at  the  time 
seemed  to  indicate  that,  in  his  opinion,  the  natural  movement  of  gold  was 
toward  this  country,  but  that  the  flow  was  being  lured  to  other  markets 
by  the  practices  of  European  banks.  He  apparently  hoped  to  overcome  what 
he  took  to  be  an  artificial  diversion  of  gold  from  the  United  States  by  adopting, 
through  the  agency  of  the  Treasury,  measures  similar  to  those  which  were 
being  employed  by  the  French  and  German  central  banks."  * 

1A.  P.  Andrew,  Quarterly  Journal  of  Economics,  August,  1907,  pp.  544-546. 
(For  Questions  and  References,  see  the  following  chapter.) 


CHAPTER   XVIII 
PROTECTION   AND   FREE  TRADE 

WE  are  now  in  a  position  to  review  intelligibly  the  pros  and 
cons  of  the  modern  tariff  controversy.  Because  of  the  limitations 
of  space,  it  will  be  desirable  to  confine  the  discussion  almost 
wholly  to  American  conditions,  although  most  of  the  arguments 
are  applicable  to  other  countries  as  well. 

The  Case  for  Protection.  —  (i)  One  of  the  most  captivating 
arguments  for  protection  is  the  assertion  that  it  promotes  nation- 
alism, which  is  held  to  be  a  good  thing.  Domestic  trade,  it  is 
claimed,  draws  the  citizens  of  a  country  together,  while  international 
trade  is  cosmopolitan  and  tends  to  their  separation.  Upon  the 
creation  of  our  federal  government,  state  tariffs  were  abolished 
and  their  place  taken  by  a  national  tariff  designed  partly  to  pro- 
tect the  whole  of  the  country  against  the  rest  of  the  world.  The 
introduction  of  national  protection  thus  went  hand  in  hand  with 
the  promotion  of  internal  free  trade;  and  Professor  Schmoller 
even  maintains  the  general  thesis  that,  historically,  this  double 
process  of  internal  abolition  and  external  extension  of  tariffs 
marks  the  formation  of  new  states,  particularly  federal  states. 
Protection  against  foreign  competition,  he  asserts,  is  thus  his- 
torically coincident  with  the  enfranchisement  of  internal  trade; 
and  has  as  its  main  object  the  creation  of  a  strong  national  eco- 
nomic unity,  without  which  permanent  political  unity,  he  thinks, 
is  impossible. 

(2)  Government  should,  the  protectionists  say,  foster  infant 
industries  in  order  to  develop  our  natural  resources  and  to  pro- 
duce diversity  in  industrial  pursuits.  It  is  admitted  that  protec- 
tion is  temporarily  expensive,  but  so  is  the  prohibition  of  child 
labor  temporarily  expensive.  We  prevent  children  from  earning 

300 


PROTECTION  AND   FREE  TRADE  301 

a  little  while  they  are  young  in  order  that  they  may  earn  more 
when  they  are  old.  For  the  same  reasons  trades  unions  rightfully 
insist  that  apprentices  shall  be  given  a  broad  knowledge  of  the 
trade  they  are  learning,  although  it  is  more  profitable  for  the  em- 
ployer to  have  them  specialize  early  in  some  narrow  branch  of 
the  work.  So,  similarly,  free  trade  prevents  a  nation  from  special- 
izing too  exclusively  in  its  undeveloped  stage,  in  order  that  it  may 
the  sooner  arrive  at  industrial  manhood. 

Economists  have  generally  admitted  that  there  is  a  certain 
amount  of  truth  in  this  argument.  If  an  industry  gets  an  early 
start  in  a  given  district,  this  locality  is  likely  to  retain  its  advan- 
tage because  of  the  concentration  there  of  capital  and  labor  ac- 
quainted with  the  requirements  and  possibilities  of  the  industry. 
Thus,  69.3  per  cent  of  all  the  clocks  manufactured  in  this  country 
are  made  in  Connecticut,  for  no  other  reasons  that  one  can  see 
than  those  suggested  in  the  explanatory  phrase  —  "the  momen- 
tum acquired  by  an  early  start."  And  this  localization  of  indus- 
try is  artificially  fostered  by  the  habit,  common  to  exporters  all 
over  the  world,  of  selling  abroad  more  cheaply  than  at  home. 
The  export  trade  seems  to  be  universally  coddled.  Of  course, 
such  localized  industries  can  be  maintained  only  when  the  cost 
of  transporting  the  article  is  small;  and  when  other  districts  do 
not  possess  unusual  natural  advantages  in  the  way  of  accessibility 
to  superior  raw  material,  power,  or  skilled  labor.  The  census 
studies  in  the  localization  of  domestic  industries l  seem  to  indicate 
that  while  the  industrial  inertia  of  which  we  have  been  speaking 
is  an  important  factor,  it  is  not  so  important  as  the  opposing 
forces  making  for  territorial  diffusion  of  industry. 

A  most  interesting  illustration  of  an  attempt  to  crush  the  "  infant  indus- 
tries "  of  a  competing  nation  is  found  in  the  effort  of  English  manufacturers, 
after  the  War  of  1812,  to  recover  the  American  market  of  which  they  had  been 
temporarily  deprived  by  the  long  period  of  non-intercourse.  "English 
manufacturers,  eager  to  regain  control  of  the  lost  markets,  sent  in  shiploads 
of  cotton  and  woolens  and  iron  manufactures,  which  they  offered  on  the  most 
liberal  terms  to  their  agents  in  this  country.  The  goods  were  taken  on  credit 
and  disposed  of  at  auction.  The  object  was  to  undersell  at  any  cost,  and  thus 

1  Special  Census  Report,  "  Manufactures,"  1905,  Part  I,  p.  cclx.    Cf.  also, 
Twelfth  Census,  "  Manufactures,"  Part  I,  pp.  cclx-codv. 


302 


OUTLINES    OF   ECONOMICS 


break  down  the  infant  industries.  Lord  Brougham  justified  the  speculative 
character  of  this  trade  on  the  ground  that  '  it  was  well  worth  while  to  incur 
a  loss  upon  the  first  exportation,  in  order,  by  the  glut,  to  stifle  in  the  cradle 
those  rising  manufactures  in  the  United  States  which  the  war  had  forced  into 
existence  contrary  to  the  natural  course  of  things.'  "  ' 

(3)  Closely  connected  with   the  preceding  arguments  is  a  de- 
fense of  protection  based  upon  grounds  of  war  and  military  neces- 
sity.    Industrial  independence,  it  is  asserted,  prepares  a  nation 
better  for  international  war.    There  is  unquestionably  a  great 
deal  of  truth  in  the  argument.     Certainly  a  wise  nation  will  see 
to  it  that  within  its  boundaries  factories  exist  which  can  manu- 
facture arms  and  all  the  necessary  munitions  of  war.     But  success 
in  war  is  not  dependent  upon  arms  and  ammunitions  alone.   There 
must  be  a  plentiful  supply  of  money,  and  whatever  use  may  be 
made  of  credit,  enormous  amounts  of  money  must  be  raised  by 
taxation.2    But  the  source  of  taxation  is  a  flourishing  condition 
of  private  industry;    and  the  industry  of  the  average  nation  de- 
pendent upon  international  trade  cannot  flourish  in  times  of  war. 
The  failure  of  the  South  in  the  Civil  War  was  very  largely  due 
to  her  industrial  dependence  upon   the  cotton  export  trade.     A 
sufficient  diversification  of  industry  to  prevent  industrial  paralysis 
in  times  of  war  is,  we  believe,  manifestly  desirable. 

(4)  The  home  market  argument  for  protection  naturally  fol- 
lows.   Much  that  is  said  in  defense  of  this  claim  is  childish  or 
silly.    One   distinguished    American    economist   seriously   main- 
tained that  a  country  can  remain  permanently  prosperous  only 
on  condition  that  what  is  taken  from  the  soil  shall  be  returned  in 
manure  and  other  kinds  of  fertilizers,  and  that  this  will  be  accom- 
plished only  when  the  products  of  the  soil  are  consumed  at  home. 
A  much  stronger  application  of  the  argument,  however,  is  found 
in  the  assertion  that  the  home  market  is  superior  because  it  is  a 
surer  market.     A  foreign  market  is  usually  a  precarious  market. 
It  is  likely  to  be  closed  by  war  or  by  capricious  changes  in  tariff 
policy.     Protection  is  unquestionably  expensive  to  the  country 

1  Coman,  Industrial  History  of  the  United  States,  p.  185. 

8  For  a  classic  explanation  of  the  dependence  of  both  public  credit  and  taxation 
upon  a  flourishing  condition  of  private  business  in  times  of  war,  see  Public  Debts. 
by  Henry  C.  Adams. 


PROTECTION   AN7D    FREE   TRADE 


303 


that  protects,  but  it  is  worth  paying  something  to  keep  industries 
in  continuous  operation. 

(5)  This  brings  us  to  the  argument  against  "dumping."  By 
dumping  is  meant  the  sale  of  products  abroad  at  prices  lower  than 
those  charged  at  home.  Dumping  arises  in  a  variety  of  ways. 
Export  bounties  may  be  granted  by  the  home  country  for  the  spe- 
cific purpose  of  encouraging  foreign  trade;  or  a  monopoly  may 
find  it  profitable  to  dispose  of  a  surplus  abroad  at  prices  which 
would  be  needlessly  low  in  the  highly  protected  home  country; 
and,  indeed,  there  is  good  reason  to  believe  that  many  manufac- 
turers for  the  export  trade  make  it  a  practice  to  sell  abroad  at 
unusually  low  prices  whenever  they  believe  that  their  foreign 
market  is  threatened.  As  was  stated  above,  the  custom  of  "cod- 
dling" the  export  trade  seems  to  be  very  general. 

Now  if  the  reduction  of  prices  were  permanent,  the  country  in 
which  the  products  are  dumped  would  have  no  real  cause  for  com- 
plaint. On  the  contrary,  it  might  logically  regard  itself  as  the 
beneficiary  of  the  costly  bounties  of  the  other  nation.  But  real 
dumping  is  not,  and  in  the  nature  of  things  cannot  be,  permanent. 
So  far  as  it  may  be  said  to  have  a  rational  object,  it  aims  to  sup- 
press competing  industries  by  selling  temporarily  below  cost;  and 
when  those  industries  are  forced  out  of  business,  prices  will  be 
raised.  So  true  is  this  that  economists  have  generally  indorsed 
import  taxes  and  other  temperate  retaliatory  measures  designed  to 
abolish  dumping.  Canada,  for  instance,  has  authorized  the  levy 
in  such  cases  of  a  special  dumping  duty  "equal  to  the  difference 
between  the  selling  price  of  the  article  for  export  and  the  fair 
market  value  thereof  for  home  consumption."  A  few  years  ago 
the  beet-sugar  industry  of  France  and  Germany  was  so  stimu- 
lated by  bounties  that  even  England,  the  principal  dumping 
ground  of  the  product,  was  forced  to  threaten  reprisals  in  the  shape 
of  countervailing  import  duties.  England's  resolute  attitude,  it 
may  be  added,  led  finally  to  the  virtual  abolition  of  sugar  bounties 
at  the  International  Sugar  Conference  of  1903.  In  general,  there 
seems  to  be  ample  justification  for  protective  duties  that  are  hon- 
estly used  to  ward  off  destructive  attacks  upon  home  industries 
which,  if  subjected  only  to  legitimate  competition,  would  be  able 


304  OUTLINES   OF  ECONOMICS 

to  maintain  themselves  in  the  long  run.  It  is  evident  that  we 
have  here  returned  to  the  substratum  of  truth  contained  in  the 
infant  industry  and  home  market  arguments. 

Dumping  has  been  more  productive  of  arguments  against  protection  than 
of  arguments  for  protection,  in  the  United  States;  and  the  opponents  of  pro- 
tection have  laid  great  emphasis  upon  the  fact  that  many  articles  of  American 
manufacture  are  sold  abroad  more  cheaply  than  at  home.  That  this  is  a  fact 
is  now  generally  admitted.  But  the  protectionists  maintain  that  most  of  this 
can  be  explained  by  the  rebates  allowed  to  American  exporters  under  our 
drawback  laws.  Ex-Secretary  of  the  Treasury  Shaw  estimates  that  in  1906, 
owing  to  these  drawbacks,  about  $140,000,000  of  American  manufactures 
might  have  been  legitimately  sold  abroad  at  less  than  domestic  prices.1 

(6)  Intimately  related  to  the  arguments  which  we  have  been 
considering  is  the  claim  that  the  distribution  of  labor  and  capital 
of  a  free-trade  nation  is  subject  to  the  control,  and  indeed,  one 
may  say,  to  the  whim  and  caprice  of  foreign  nations.     Industries 
differ  in  their  effect  upon  the  physique  and  character  of  the  people 
who  pursue  them.    The  builder,  the  skilled  engineer,  the  electrical 
worker,  are  benefited  intellectually,  physically,  and  morally  by 
their  occupations.     But  the  tailor,  the  maker  of  ready-made  cloth- 
ing, and  the  sweat-shop  worker  are  probably  harmed  rather  than 
elevated  by  the  nature  of  their  employment.     Now  if  foreign  na- 
tions subsidize  by  protection  and  bounty  the  desirable  industries, 
they  may  leave  to  the  free-trade  nation  only  those  industries  which 
the  protected  nations  do  not  wish  to  maintain. 

(7)  Finally,  protectionists    appeal  to  the  wage-earning  classes 
with  the  argument  that  protection  increases  wages  by  diversify- 
ing industry  and  thus  stimulating  the  demand  for  labor.     Indeed 
the  typical  protectionist  goes  farther  than  this,  and  maintains  that 
every  American  industry  is  entitled  to  an  amount  of  protection 
equal  to  the  difference  between  the  wages  which  it  pays  and  the 
wages  paid  by  its  most  efficient  foreign  competitor.  The  latter  variety 
of  this  argument  seems  to  be  plainly  absurd,  or  at  least  obviously 
inconsistent  with  the  initial  assertion  that  protection  raises  wages. 
For,  taken  together,  —  and  they  are  frequently  advanced  in  com- 
pany, —  they  result   in   this  magnificently  cumulative   plea   for 
ever  increasing  tariffs:  protection  raises  wages,  —  but  high  wages 

1  Leslie  M.  Shaw,  Current  Issues,  Chap.  XXI. 


PROTECTION   AND    FREE   TRADE 


305 


put  the  American  manufacturer  at  a  disadvantage  in  competing 
with  foreign  producers,  —  and  the  home  producer  must  be  pro- 
tected to  the  extent  of  the  difference  in  wages,  —  therefore  every 
advance  in  protective  duties  laid  for  the  benefit  of  the  wage  earner 
must  be  accompanied  by  an  additional  advance  for  the  benefit  of 
the  manufacturer,  —  and  so  ad  infinitum. 

Arguments  of  Free  Traders.  —  In  the  first  place,  we  may  dis- 
miss a  number  of  arguments  which  are  so  extreme  as  to  weaken 
rather  than  strengthen  the  cause  of  free  trade,  (i)  For  instance, 
it  is  frequently  alleged  that  protective  tariffs  violate  the  assumed 
natural  right  of  every  man  to  buy  his  goods  where  he  will  and  sell 
his  products  wherever  he  sees  fit,  untrammeled  by  human  laws. 
The  futility  of  arguments  based  upon  an  assumption  of  natural 
rights  has  been  sufficiently  exposed  elsewhere,  and  needs  no  elabo- 
ration at  this  point. 

(2)  It  has  also  been  claimed  that  protective  tariffs  in  the  United 
States  are  unconstitutional,  but  this  argument  is  idle;  it  would  be 
most  unfortunate  and  anomalous  if  nowhere  in  our  country  were 
lodged  the  power  to  pass  such  regulations  regarding  international 
commerce  as  might  appear  to  be  required  for  the  promotion  of 
the  public  welfare.     Furthermore,   the  charge  of  unconstitution- 
ally does  not  correspond  to  the  opinion  of  our  best  jurists,  and  it 
is  very  certain  that  we  shall  never  see  a  supreme  court  in  the 
United   States   which   will  venture   to  pronounce  protectionism 
unconstitutional. 

(3)  In  a  similar  vein  protectionism  has  been  called  socialism, 
but  this  epithet  is  so  generally  applied  to  whatever  a  person  in- 
competent to  argue  a  cause  does  not  like  that  it  will  scarcely  ter- 
rify any  one. 

The  really  able  arguments  of  free  traders  are  those  which  aim 
to  show  either  that  protection  actually  does  positive  harm,  or  that 
it  fails  to  accomplish  its  ends,  or  that  those  ends  may  be  better 
accomplished  without  protection. 

(4)  The  natural  starting  point  of  the  free-trade  argument,  and 
the  goal  to  which  it  inevitably  returns  is  the  theory  of  compara- 
tive costs  laid  down  on  page  285,  the  proposition  that,  so  long  as 
there  are  relative,  not  necessarily  absolute,  differences  in  the  cost 


306  OUTLINES    OF   ECONOMICS 

of  producing  cheaply  portable  articles  in  various  countries  of  the 
world,  so  long  will  there  be  international  trade  in  those  articles. 
Protective  tariffs,  therefore,  merely  divert  capital  and  labor  from 
intrinsically  more  productive  to  intrinsically  less  productive  in- 
dustries. To  revert  to  our  simile  of  the  lawyer  and  his  stenog- 
rapher, protection  aims  to  induce  the  lawyer  to  write  his  own 
letters,  on  the  general  grounds  that  lawyers  are  more  intelligent 
people  than  stenographers,  and  if  sufficient  encouragement  be 
held  out  to  them  they  may,  in  the  course  of  time,  be  educated  up 
to  the  point  of  operating  their  own  typewriting  machines  better 
than  the  stenographers  whom  they  have  previously  hired. 

Temperate  advocates  of  "freer  trade"  do  not  contend  that  this 
law  of  comparative  costs  demonstrates  the  desirability  of  complete 
free  trade  under  all  circumstances.  They  admit  that  it  may  occa- 
sionally be  profitable  for  a  country  to  pay  enormous  bounties  — 
this  is  what  protection  amounts  to  —  for  the  development  of  cer- 
tain industries.  But  they  do  contend  that  it  establishes  free 
trade  as  the  general  rule,  every  departure  from  which  should  re- 
quire the  most  positive  justification.  More  particularly,  they 
hold,  that  at  the  present  time,  after  a  century  of  industrial  devel- 
opment that  obviates  any  military  necessity  for  a  further  diversifica- 
tion of  industry,  capital  and  labor  should  be  freely  allowed  to 
take  themselves  to  those  employments  in  which  they  can  reap  the 
largest  natural  reward,  a  reward,  that  is  to  say,  which  is  not  arti- 
ficially enhanced  by  subsidies  wrung  from  the  general  body  of 
consumers. 

(5)  Moreover,  it  is  not  clear  that  protection  is  necessary  to  di- 
versify industry  in  a  country  with  such  varied  natural  resources  as 
the  United  States.  The  claims  of  the  protectionists  at  this  point 
may  be  tested  by  examining  conditions  within  the  wide  borders 
of  our  own  country,  within  which  trade  is  wholly  free.  Now,  if 
protection  were  necessary  to  foster  infant  industries  and  bring 
them  to  maturity,  the  manufacturing  industries  of  this  country 
would  still  be  concentrated  in  the  northern  states  of  the  Atlantic 
seaboard  where  they  first  gained  a  foothold.  But  they  have  not 
been  so  confined.  The  early  establishment  of  the  textile  indus- 
tries in  New  England  has  not  prevented  their  recent  development 


PROTECTION  AND  FREE  TRADE         307 

in  the  South.  Indeed,  the  so-called  "center  of  manufactures" 
moved  steadily  west  from  south-central  Pennsylvania  in  1850  to 
central  Ohio  in  1900;  and  the  increase,  at  the  present  time,  is 
much  more  rapid  in  the  South  and  West  than  in  older  sections  of 
the  country.  Internal  free  trade  has  not  prevented  the  diversifi- 
cation of  industry  in  the  United  States,  and  has  not  delayed  it 
longer  than  was  desirable.  For  who  shall  say  that  the  Dakotas 
and  other  typical  agricultural  states  of  the  Union  have  greatly 
suffered  from  the  absence  of  grimy  factory  towns  and  the  slums 
which  almost  inevitably  accompany  them? 

(6)  The   inevitable   spread   of    manufactures   throughout  the 
United  States  suggests  the  essential  weakness  of  the  home  market 
argument.     International  trade  expands  just  as  inevitably  as  the 
manufacturing  area.     It  might  be  desirable  to  confine  domestic 
producers  to  the  more  certain  home  market,  which  cannot  be  de- 
stroyed by  tariff  wars  or  international  complications.     But,  as  a 
matter  of  fact,  home  producers  will  seek  foreign  markets,  and  the 
nation  that  sells  abroad  must  buy  abroad.     Since  the  Civil  War  we 
have  protected  home  producers  with  extremely  high  tariffs.     But 
in  the  last  twenty-five  years  our  foreign  trade  has  increased  at  a 
rate  unequaled  by  any  of  the  other  great  commercial  countries 
of  the  world.1     Protective  tariffs  can  cripple  and  harass  and  dis- 
tract foreign  trade,  but  they  cannot  permanently  suppress  it.    No 
tariff  can  make  the  costs  of  producing  all  the  articles  common  to 
commerce  precisely  proportional  in  all  quarters  of  the  globe. 

(7)  The  protectionistic  appeal  to  the  wage  earner  seems  par- 
ticularly inconclusive.    One  reason  for  distrusting  it  is  the  double- 
faced  way  in  which  it  is  manipulated  to  suit  the  particular  re- 
quirements of  time  and  place.     France  wants  protection  in  order 
to  protect   her  low-paid  workmen  against  the  greater  skill  and 
efficiency  of  America's  highly  paid  workers.    The  United  States, 
on  the  other  hand,  must  have  protection  in  order  to  shield  her 
highly  paid  employees  from  competition  with  the  "pauper  labor 
of  Europe."     When  first  used  in  the  United  States,  the  argument 
was  that  wages  were  already  so  high  in  this  country  as  compared 

1  Special  Reports  of  the  Census  Office,  "Manufactures,"  1905,  Part  I,  p.  ccc. 
The  specific  period  referred  to  is  the  twenty-five  years,  1880-1905. 


308  OUTLINES   OF  ECONOMICS 

with  England,  that  it  was  impossible  for  manufacturers  in  this 
country  to  pay  the  American  rates  and  continue  to  compete  with 
English  manufacturers.  Later,  cause  and  effect,  as  related  in  the 
earlier  syllogism,  were  reversed,  and  it  was  asserted  that  the  high 
wages  in  this  country  were  due  to  protection,  from  which  it 
followed  naturally  that  in  order  to  raise  wages  higher,  still  more 
protection  would  have  to  be  given. 

We  cannot  arrive  at  any  useful  conclusions  concerning  wages, 
however,  without  considering  the  efficiency  of  labor  and  the  pro- 
ductivity or  favorableness  of  the  environment  in  which  the  laborer 
works.  The  reason  why  American  labor  may  receive  higher 
wages  and  yet  have  nothing  to  fear  from  the  competition  of  less 
highly  paid  workmen  in  Europe  is  found  in  the  greater  produc- 
tivity of  American  labor  (though  this  greater  productivity  may 
depend  more  upon  the  natural  wealth  of  this  country  than  upon 
any  innate  technical  superiority  of  the  American  workmen).  The 
average  American  workman  is  in  no  more  danger  from  the  goods 
produced  by  the  "pauper  labor"  of  Europe  than  the  highly  paid 
workman  of  Montana  is  threatened  by  the  products  of  his  less 
remunerated  fellow- workmen  of  New  England  and  the  South. 
Labor  competes  with  labor,  not  with  commodities.  Consequently, 
if  it  is  really  desired  to  protect  labor,  the  logical  way  would  be  to 
place  a  tax  on  imported  labor,  or  by  other  measures  to  reduce 
immigration.  If  this  were  done,  those  who  desire  labor  would  be 
obliged  to  pay  heavily  for  it,  as  actually  happened  in  England 
after  the  "Black  Death"  in  the  fourteenth  century  had  killed  off 
a  large  part  of  the  laboring  population.  Indeed,  if  our  tariff 
makers  are  sincerely  anxious  to  benefit  labor,  they  should,  after 
rendering  labor  scarce  and  dear  by  restricting  immigration,  en- 
courage the  importation  of  such  commodities  as  are  consumed 
primarily  by  wage  earners,  in  order  that  labor  may  secure  an 
abundance  of  them  cheaply. 

No  intelligent  free  trader  would  deny  that  there  are  now  dependent  upon 
protection  many  industries  which  pay  high  wages,  nor  that  the  sudden  aboli- 
tion of  protection  would  throw  many  wage  earners  out  of  work.  Their  con- 
tention in  the  first  case  is  merely  that  by  taxation  and  by  diverting  capital 
and  labor  into  naturally  unproductive  industries,  protection  lowers  the  general 


PROTECTION  AND   FREE  TRADE 


309 


level  of  real  wages.  Their  reply  to  the  second  point  is  that  protection  affects 
the  industrial  organism  much  as  the  alcoholic  habit  affects  the  human  organ- 
ism. To  abandon  the  habit  suddenly  would  certainly  be  painful  and  prob- 
ably dangerous  —  but  this  is  sufficient  reason  neither  for  increasing  the  dram 
nor  delaying  the  gradual  abandonment  of  the  habit. 

(8)  Turning  to  the  fiscal  aspects  of  the  question,  the  free  trader 
asserts  that  there  is  little  or  nothing  to  be  said  in  favor  of  protection. 
The  protective  import  duty,  as  compared  with  the  import  duty  "for 
revenue  only,"  is  a  poor  tax.  It  is  uncertain  and  viciously  vari- 
able, and  in  the  great  majority  of  cases  is  borne  by  the  home 
consumer.  To  the  extent  that  it  does  not  prevent  importation  it 
affords  no  protection;  and  in  so  far  as  it  does  protect,  it  yields  no 
revenue  to  the  government.  If  it  raises  the  price  of  the  article  upon 
which  it  is  levied,  however,  the  increase  constitutes  a  tax  upon  one 
class  of  society  —  the  consumer  —  for  the  benefit  of  another  class 
—  the  producers  of  the  article.  One  authority,  perhaps  the  fore- 
most authority,  upon  the  American  tariff  problem,  estimates  that 
the  present  tariff  upon  sugar  results  in  an  annual  tax  upon  Ameri- 
can consumers  of  $101,000,000,  of  which  $52,400,000  go  into  the 
treasury  and  $48,600,000  into  the  hands  of  sugar  producers,  prin- 
cipally resident  in  Hawaii,  Porto  Rico,  and  Cuba.1 

In  answer  to  this  charge  that  protection  involves  the  taxation  of 
one  class  for  the  benefit  of  another  class,  it  is  not  sufficient  to 
reply  that  everybody  is  free  to  take  advantage  of  the  subsidy  and 
engage  in  a  protected  industry.  Everybody  is  not  free  to  estab- 
lish a  rolling  mill  or  a  silk  factory  or  a  tin-plate  plant.  Protection 
means  the  taxation  of  the  less  acute,  the  less  enterprising,  the  less 
educated  and  the  poorer  classes  in  order  to  create  additional  com- 
mercial opportunities  for  the  abler,  wealthier,  and  better-educated 
classes,  thus  reversing  the  whole  spirit  of  modern  taxation  which 
contemplates  —  so  far  as  it  may  be  done  without  danger  —  rather 
the  taxation  of  the  rich  for  the  assistance  of  the  poor  than  the 
taxation  of  the  poor  for  the  benefit  of  the  rich.  It  is  not  implied, 
of  course,  that  protection  involves  class  legislation  of  an  unlawful 
character,  nor  that  taxes  are  collected  from  one  class  and  handed 
over  in  cold  cash  to  the  members  of  another  class.  The  point 

1  Professor  F.  W.  Taussig,  in  the  Atlantic  Monthly  for  March,  1908,  p.  343. 


310  OUTLINES   OF  ECONOMICS 

turns  upon  the  relative  ability  of  the  various  social  classes  to  take 
advantage  of  artificial  opportunities  created  by  the  state  at  enor- 
mous expense  to  all. 

(9)  This  brings  us  naturally  to  the  ethical  criticism  of  protection, 
the  charge  that  by  making  the  temporary  prosperity  of  influential 
classes  dependent  upon  government  bounty,  protection  encour- 
ages those  classes  to  exert  a  demoralizing  pressure  upon  federal 
legislation.     So  great  is  the  stake  of  private  interests  in  tariff  legis- 
lation, that  systematic  lobbying,  log  rolling,  and  corruption  of  the 
voter  follow  as  inevitable  consequences.    The  beneficiary  of  the 
tariff  sacrifices  his  disinterested  convictions  concerning  the  general 
welfare,  in  order  to  preserve  his  own  little  subsidy  from  the  gov- 
ernment.   Neither  the  citizen  nor  the  legislator  can  vote  purely, 
when  his  pocketbook  is  so  vitally  affected.     Even  if  we  admit 
what  is  probably  true,  that  protection  has  resulted  in  comparatively 
little  direct  bribery  of  legislators,  there  seems  no  escape  from  the 
conclusion  that  it  creates  a  kind  of  interest  in  legislation  which 
is  inherently  dangerous  and  exceedingly  difficult  to  keep  within 
legitimate  bounds.     And  as  the  manufacturing  industries  of  the 
country  fall  more  and  more  into  the  hands  of  large  corporations 
and  trusts,  the  possibilities  of  political  corruption  become  more 
and  more  sinister,  while  the  character  of  the  chief  beneficiaries  of 
protection  make  them  more  and  more  undeserving  of  the  bounties 
which  they  receive. 

(10)  Finally,  it  is  alleged  that  protection  fosters  monopolies  by 
shutting  off  international  competition.    This  contention  forms  the 
subject-matter  of  a  particularly  heated  dispute,  and  the  exact  ex- 
tent to  which  the  charge  is  true  cannot  be  determined  at  this  time. 
Certain  modifications  of  the  more  extreme  charge,  however,  are 
hardly  open  to  question.     Protectionists  confessedly  take  it  for 
granted  that  if  foreign  competition  is  shut  off  or  lessened,  home 
producers  will  still  compete.    Nevertheless,  highly  protective  du- 
ties are  still  levied  upon  commodities  whose  manufacture  in  the 
United  States  has  fallen  under  the  substantial  control  of  monopo- 
lies.    It  is  furthermore  admitted  that  such  monopolies  frequently 
sell  their  products  at  lower  prices  in  foreign  countries  than  in  the 
United  States;   while  it  is  impossible  to  deny  that  —  whether  the 


PROTECTION   AND    FREE  TRADE  311 

monopoly  was  created  by  protection  or  not  —  the  abolition  of  the 
duties,  by  giving  foreign  producers  a  chance  to  compete  in  this 
country,  would  tend  to  reduce  prices,  and  thus  give  the  American 
public  a  valuable  ally  in  their  struggle  against  monopoly.  The 
tariff  therefore  may  or  may  not  be  the  mother  of  trusts,  but  it 
unquestionably  deprives  the  American  people  of  a  strong  weapon 
against  the  trusts. 

Some  General  Considerations.  —  Before  attempting  to  sum  up 
the  preceding  arguments  and  strike  a  practical  working  balance, 
it  is  necessary  to  call  attention  to  certain  general  considerations 
which  have  not  figured  in  the  foregoing  "starched  procession"  of 
pros  and  cons.  In  the  first  place,  it  is  necessary  to  remember  that 
the  federal  government  must  secure  a  large  revenue  from  tariff 
duties,  and  that  in  consequence  the  question  which  we  are  dis- 
cussing is  not  one  of  protection  versus  free  trade,  but  of  protection 
versus  freer  trade.  In  the  second  place,  the  economic  importance 
of  the  whole  controversy  has  unquestionably  been  exaggerated. 
We  find  a  country  like  England  prosperous  under  free  trade;  we 
find  countries  like  France  and  the  United  States  prosperous  under 
protection.  It  is  of  real  but  not  of  vital  importance.  Our  inter- 
nal trade  vastly  exceeds  our  foreign  trade  in  every  way.  The 
domestic  trade  of  the  Mississippi  Valley  alone  is  far  greater  than 
our  entire  foreign  commerce.  In  the  third  place,  the  American 
tariff  is  a  historical  growth,  and  bad  as  it  may  be  in  many  respects 
it  has  taken  deep  root.  During  the  last  century  it  has  become 
part  of  our  life,  and  cannot  be  suddenly  eradicated  with  impunity. 
If  it  is  true  that  American  labor  would  be  better  off  without  it,  it 
does  not  follow  that  it  ought  to  be  removed  suddenly  in  the  inter- 
ests of  American  labor.  If  the  industrial  growth  is  abnormal,  it 
is  none  the  less  true  that  adjustment  to  normal  conditions  is  a 
painful  process  and  should  be  conducted  cautiously.  Displace- 
ments of  labor  and  capital  cause  suffering  and  loss,  and  it  is  clear 
that  any  reform  of  the  tariff  must  be  conservative  and  careful, 
a  movement  toward  freer  trade,  not  the  sudden  withdrawal  of 
protection. 

Conclusions.  — Most  of  the  arguments  enumerated  above,  both 
for  and  against  protection,  contain  a  measure  of  truth.  Historic- 


312  OUTLINES   OF   ECONOMICS 

ally,  we  believe  that  protection  was  inevitable  in  the  United 
States,  and  in  the  early  period  of  the  country's  development,  bene- 
ficial. During  the  three  great  wars  which  seriously  threatened  the 
stability  of  this  country,  many  new  industries  sprang  up  which, 
upon  the  cessation  of  war  and  the  resumption  of  international 
trade,  were  seriously  threatened  by  foreign  competition.  Many 
of  these  industries  were  so  suited  to  our  soil  and  our  people  that 
only  a  short  period  of  protection  was  needed  to  make  them  self- 
supporting.  Under  the  circumstances  it  would  have  been  unwise 
to  permit  the  sacrifice  of  the  capital  invested  in  these  industries; 
and  whether  it  would  have  been  unwise  or  not,  human  nature  is 
such  that  the  needed  protection  was  sure  to  be  granted.  In  short, 
there  is  a  large  measure  of  real  truth  in  the  infant  industry  argu- 
ment. 

Circumstances,  however,  have  radically  changed  in  the  last  few 
decades.  Our  quondam  infant  industries  have,  for  the  most  part, 
attained  a  very  vigorous  maturity,  and  in  some  instances  have 
become  belligerent  and  prone  to  monopolistic  bullying;  our  manu- 
factures have  become  sufficiently  diversified  to  remove  all  danger 
of  industrial  collapse  in  time  of  war;  and,  above  all,  we  are  rapidly 
entering  the  economic  stage  in  which,  according  to  the  ablest  ex- 
ponent of  protection  that  economic  science  has  ever  known,  — 
Frederick  List,  —  protection  is  a  hindrance  rather  than  a  help. 
That  is  to  say,  we  are  rapidly  building  up  an  extensive  export 
trade  in  manufactured  articles;  year  by  year  raw  materials  con- 
stitute a  larger  proportion  of  our  imports  and  a  smaller  propor- 
tion of  our  exports;  and  we  have  already  become  the  greatest 
exporting  country  of  the  world.  All  this  means  that  in  the  near 
future  our  manufacturers  themselves  will  look  with  kindlier  eyes 
upon  the  withdrawal  of  the  protection  they  do  not  need,  which  in 
fact  actually  increases  the  cost  of  some  of  their  raw  materials, 
and  incites  foreign  governments  to  retaliatory  taxation  upon  goods 
imported  from  the  United  States.  Our  growing  export  trade  will 
itself  bring  a  wider  appreciation  of  those  fundamental  principles 
which  have  led  economists,  with  but  few  exceptions,  to  condemn 
protection  as  a  permanent  policy  applicable  to  all  stages  of  eco- 
nomic development. 


PROTECTION   AND    FREE   TRADE 


QUESTIONS 

1.  What  is  meant  by  the  law  of  comparative  costs?     Is  the  American 
custom  of  importing  the  finer  textile  fabrics  and  manufacturing  the  coarser 
ones  an  effect  of  this  law  ? 

2.  In  the  illustrative  case  cited  on  page  285,  would  America  confine  herself 
wholly,  or  only  chiefly,  to  the  production  of  flour  ?     Would  the  fact  that  some 
cloth  was  produced  in  America,  and  some  flour  in  Holland,  affect  the  validity 
of  the  law  of  comparative  costs  ? 

3.  If  a  widow  needs  money  so  badly  that  she  is  willing  to  pay  200  per 
cent  a  year  for  its  use,  why  is  it  wrong  for  a  money  lender  to  charge  this  rate  ? 

4.  What  is  the  real  nature  of  the  balance  of  trade  ?     Does  our  excess  of 
exports  (merchandise)  mean  that  we  are  paying  off  our  foreign  indebtedness, 
or  merely  that  we  are  paying  interest  on  our  foreign  indebtedness? 

5.  In  what  respects  does  foreign  exchange  differ  from  exchange  between 
two  American  cities  ? 

6.  What  are  the  principal  influences  which  affect  the  rate  of  exchange  ? 

7.  Is  the  gold  supply  distributed  according  to  the  needs  or  the  respective 
demands  of  the  various  countries  ?     Are  needs  and  demands  in  this  connection 
identical  ? 

8.  Mention  as  many  methods  as  you  can  by  which  governments  have 
endeavored  to  increase  the  supply  of  gold. 

9.  To  what  extent  is  the  infant  industry  argument  true?    The  home- 
market  argument?     The  argument  against  "dumping"? 

10.  In  what  form  was  the  wages  argument  first  employed  in  the  United 
States?     In  what  does  its  essential  error  consist? 


LITERATURE 

ASHLEY,  PERCY.     Modern  Tariff  History. 

ASHLEY,  W.  J.     Tariff  Problems. 

BASTABLE,  C.  F.     TJteory  of  International  Trade. 

BROOKS,  H.  K.     Foreign  Exchange  Text-Book. 

CLARE,  GEORGE.    Tim  ABC  of  the  Foreign  Exchanges;  The  Money  Market 

Primer. 

DAY,  CLIVE.     History  of  Commerce. 
ELY,  R.  T.     Problems  of  To-day.     Chaps.  I-XV. 
FISK,  G.  M.     International  Commercial  Policies. 
GIFFEN,  ROBERT.     The  Use  of  Export  and  Import  Statistics;  and  Economic 

Inquiries  and  Studies,  Vol.  I,  Chap.  IX. 
GEORGE,  HENRY.     Protection  or  Free  Trade. 
GOSCHEN,  G.  J.     Theory  of  the  Foreign  Exchanges. 
LAUGHLIN,  J.  L.     The  Principles  of  Money.     Chap.  X,  pp.  336-370. 
MARGRAFF,  A.  W.     International  Exchange. 


314  OUTLINES   OF   ECONOMICS 

PATTEN,  S.  N.     The  Economic  Basis  of  Protection. 

PRATT,  S.  S.     The  Work  of  Wall  Street. 

RABBENO,  V.     The  American  Commercial  Policy. 

STANWOOD,  E.     American  Tariff  Controversies  in  the  Nineteenth  Century. 

SUMNER,  W.  G.     History  of  Protection  in  the  United  States. 

TAUSSIG,  F.  W.  Tariff  History  in  the  United  States.  "The  Present 
Position  of  the  Doctrine  of  Free  Trade,"  Publications  of  the  American 
Economic  Association,  Third  Series,  Vol.  VI,  pp.  29-65 ;  also  State 
Papers  and  Speeches  on  the  Tariff. 


PART  V 
DISTRIBUTION 

CHAPTER   XIX 
DISTRIBUTION   AS   AN    ECONOMIC    PROBLEM 

IT  has  already  been  remarked  that  the  production  and  the  dis- 
tribution of  the  annual  income  of  society  cannot  be  sharply  sepa- 
rated, and  more  or  less  has  already  been  said  about  the  four  parts 
into  which  the  products  of  industry  are  usually  divided;  namely, 
wages,  interest,  rent,  and  profits.  The  greater  part  of  distribu- 
tion might  undoubtedly  be  considered  under  the  general  heading 
"Production,"  but  on  the  other  hand,  it  is  frequently  asserted  that 
distribution  is  "the  true  center  of  all  economic  inquiries,"  and  it 
would  be  possible  to  treat  nearly  the  whole  of  production  from 
the  standpoint  of  distribution.  The  truth  is  that  these  old  tra- 
ditional divisions  of  our  subject-matter  indicate  different  points  of 
view,  and  on  this  account  it  seems  desirable  to  retain  them.  When 
we  pass  from  production  to  distribution,  we  do  not  enter  an  entirely 
new  field,  but  we  look  at  an  old  field  of  investigation  from  a  new 
point  of  view. 

The  center  of  interest  in  the  practical  applications  of  economic 
principles  has  shifted  from  production  to  distribution.  The  mer- 
cantilistic  writers  of  the  seventeenth  and  eighteenth  centuries  were 
primarily  interested  in  the  most  efficient  ways  of  increasing  the 
sum  total  of  a  nation's  wealth.  Even  Adam  Smith,  as  the  title  of 
his  great  work,  An  Inquiry  into  the  Nature  and  Causes  of  the 
Wealth  of  Nations,  indicates,  had  chiefly  in  mind  the  same  prob- 
lem, although  he  emphasized  the  fact  that  the  real  well-being  of  a 
nation  consists  in  the  well-being  of  the  great  body  of  its  people. 
During  the  past  century  the  production  of  wealth  has  increased 
beyond  all  precedent,  the  chief  factors  contributing  to  this  result 

315 


316  OUTLINES   OF  ECONOMICS 

being  the  factory  system,  the  exploitation  of  vast  natural  re- 
sources (made  possible  only  by  modern  methods  of  transportation) 
and  the  free  scope  given  to  the  initiative  of  the  individual  business 
man.  In  the  United  States,  at  least,  we  do  not  feel  that  there  are 
any  pressing  problems  concerning  the  production  of  wealth.  Yet 
poverty  still  exists,  and  its  harsh  features  are  thrown  into  sharper 
relief  by  contrast  with  the  fact  that  the  present  production  of 
wealth  per  capita  in  the  United  States  is  indisputably  the  highest 
that  the  world  has  ever  known.  Moreover,  while  the  social  dis- 
content arising  from  inequalities  in  the  distribution  of  wealth  is 
a  very  old  thing,  it  is  only  in  modern  times  that  democracy  has 
given  it  an  adequate  opportunity  for  formulated,  organized  ex- 
pression. It  is  not  too  much  to  say  that  nearly  all  the  economic 
problems  which  are  felt  to  press  upon  society  to-day  for  solution 
relate  directly  or  indirectly  to  the  distribution  of  wealth. 

It  should  be  noted,  however,  that  we  have  to  discuss  under 
the  name  "  distribution  "  two  different  processes.  The  first  and 
inclusive  meaning  of  the  term  is  the  distribution  of  the  wealth  or 
income  of  society  among  individuals  and  families  ;  in  other 
words,  the  question  of  individual  fortunes,  poverty  and  wealth. 
The  second  kind  of  distribution  is  the  division  of  the  product 
among  the  different  factors  of  production.  This  is  not  a  question 
of  wealth  versus  poverty,  but  of  wages  versus  interest,  profits, 
and  rent.  Of  course,  this  kind  of  distribution  affects  the  personal 
distribution  of  wealth,  but  it  is  by  no  means  the  same  question. 
To  explain  why  lots  in  New  York  City  command  high  rents  is  one 
thing;  to  explain  why  a  large  amount  of  these  rents  go  to  the  As  tor 
family  is  another  thing.  In  the  case  of  wages,  however,  the  two 
kinds  of  distribution  amount  to  about  the  same  thing.  There  is 
another  sense  in  which  the  word  is  not  used  in  this  chapter.  We 
do  not  mean  by  distribution  the  moving  of  goods  from  the  place 
where  they  are  produced  to  the  place  where  they  are  consumed. 
When  we  hear  of  railways  or  other  concerns  as  "distributive 
agencies,"  we  are  using  the  term  "  distribution  "  in  a  sense  very 
different  from  that  of  the  technical  economic  term  "distribution." 
Distribution  is  a  question  of  ownership,  not  a  question  of  the 
location  of  goods. 


DISTRIBUTION   AS   AN   ECONOMIC   PROBLEM 


317 


Distribution  controlled  by  Existing  Institutions.  —  The  statement  that 
distribution  is  a  matter  of  ownership  suggests  at  once  the  relation  of  private 
property  to  distribution.  Individual  wealth  is,  fundamentally,  a  sum  of 
property  rights.  Every  extension  of  property  rights  by  society,  as,  for  ex- 
ample, in  permitting  the  private  ownership  of  the  rights  to  supply  cities  with 
water,  electricity,  or  transportation  facilities,  extends  the  field  of  private 
gain  and  correspondingly  affects  the  distribution  of  wealth.  The  income 
received  by  the  successful  manager  of  a  municipal  waterworks  plant  is  un- 
doubtedly a  very  different  thing  from  the  income  the  same  individual  would 
receive  if  he  were  the  owner  of  a  franchise  permitting  him  to  conduct  the 
business  of  supplying  the  city  with  water  as  a  private  undertaking.  The 
policy  of  leasing,  rather  than  selling,  public  lands,  which  has  been  adopted 
by  some  of  the  newer  American  states,  is  bound  to  have  an  appreciable, 
even  if  not  a  very  important,  effect  upon  the  distribution  of  wealth. 

In  the  institution  of  inheritance  we  have  an  instrument  which  once  in  a 
generation  redistributes  the  property  rights  in  existing  wealth.  It  is  not 
strange  that  those  who  wish  to  limit  or  retard  the  growth  of  large  individual 
fortunes  have  looked  to  the  control  and  especially  to  the  taxation  of  inherit- 
ances as  a  means  to  this  end.  Doubtless  the  prevalence  of  large  landed 
estates  in  England  is  closely  connected  with  the  English  law  of  primogeniture, 
just  as  the  predominance  of  small  holdings  in  France  is  in  part  due  to  the 
French  law  forbidding  the  disinheritance  of  any  of  one's  children. 

Personal  freedom,  as  a  legally  guaranteed  institution,  is  also  of  fundamental 
importance.  The  factors  determining  the  income  of  the  free  workingman 
are  very  different  from  those  determining  the  portion  of  the  slave.  It  should 
be  remembered,  too,  that  the  actual  processes  by  which  wealth  is  distributed 
are  to-day  largely  controlled  by  the  institution  of  contract.  What  rent,  wages, 
or  interest  one  gives  or  receives  is  no  longer  fixed  by  custom,  as  in  the  middle 
ages,  but  is  a  matter  of  agreement  between  individuals.  So  far  as  Society 
limits  the  right  of  contract,  as  in  the  case  of  legislation  regulating  the  employ- 
ment of  women  and  children,  it  correspondingly  affects  the  distribution  of 
wealth. 

These  fundamental  institutions  are  discussed  more  fully  elsewhere  in  this 
treatise.  They  are  mentioned  in  this  connection  in  order  to  emphasize  more 
definitely  the  fact  that  the  distribution  of  wealth  takes  place  under  the  con- 
ditions imposed  by  the  existing  social  order.  Even  the  most  radical  advocates 
of  greater  equality  in  the  distribution  of  wealth  do  not  propose  an  arbitrary 
leveling  down  of  fortunes.  They  direct  their  attacks  against  one  or  more  of 
these  fundamental  institutions,  such  as  inheritance,  private  property  in  land, 
or  private  property  in  production  goods.  Then  there  are  many  persons  who 
are  willing  to  accept  the  conditions  imposed  by  the  existing  social  order, 
as  a  field  for  the  operation  of  competitive  forces  in  wealth  distribution,  but 
who  object  to  monopoly  and  special  privilege.  This  suggests  that  the  forces 
bringing  about  distribution  on  the  basis  of  the  existing  social  order  are  in 


318  OUTLINES    OF   ECONOMICS 

themselves  amenable  to  social  control.  If  those  who  secure  the  chief  prizes 
in  the  economic  struggle  may  plume  themselves  on  the  fact  that  they  are  the 
victors  in  a  game  that  is  open  to  all,  it  is  none  the  less  true  that  society  lays 
down  the  rules  of  the  game. 

A  large  part  of  the  complex  of  institutions  and  regulations  through  which 
society  controls  distribution  work  smoothly  and  silently,  their  action,  so  far 
as  society  at  large  is  concerned,  being  unconscious.  It  is  only  when  obvious 
conflicts  arise  between  some  of  the  effects  of  this  unconscious  control  on  the 
one  hand  and  present-day  ideals  of  social  welfare  on  the  other  hand,  that  the 
significance  of  any  part  of  this  fundamental  institutional  control  becomes 
generally  felt.  It  is  not  the  least  of  the  merits  of  the  study  of  economics  that 
it  emphasizes  the  fundamental  character  of  that  part  of  the  social  control 
of  wealth  production  and  wealth  distribution  which  lies  below  the  horizon 
of  social  consciousness. 

The  Distributive  Process.  —  If  each  family  produced  all  that  it 
consumed,  as  most  families  still  do  in  part,  there  would  be  no 
problem  of  distribution,  except  whatever  problems  might  arise 
as  to  the  factors  determining  the  amount  produced  by  each 
family.  But,  since  most  men  to-day  are  working  in  more  or  less 
specialized  employments,  and  for  money  incomes,  the  fact  is,  as 
was  suggested  in  a  previous  chapter,  that  distribution  takes  place 
through  a  process  of  valuation.  Some  men  (manufacturers,  mer- 
chants, farmers)  make  a  money  income  by  selling  goods  for  more 
than  it  costs  them  to  produce  them  or  to  buy  them  from  others, 
while  other  men  (laborers,  salaried  employees,  professional  men, 
capitalists,  landowners)  get  a  money  income  by  selling  their  serv- 
ices or  by  selling  the  use  of  their  capital  or  land.  In  the  first 
case,  the  money  income  takes  the  form  of  profits;  in  the  second 
case,  it  is  wages,  interest,  or  rent,  as  the  case  may  be.  A  man's 
real  income  consists  of  the  commodities  and  services  that  satisfy 
his  wants;  and  the  extent  to  which  his  money  income  can  be 
transmuted  into  real  income  depends  on  the  prices  of  these  things. 
One  always  has  the  option,  of  course,  of  investing  part  of  his 
money  income  in  production  goods  rather  than  in  consumption 
goods,  thus  giving  up  part  of  his  present  real  income  for  a  larger 
future  income.  However,  since  different  men  have  to  pay  about 
the  same  prices  for  the  same  kinds  of  goods,  a_discussion  of  the 
factors  determining  money  incomes  will  be,  ipso  facto,  a  discus- 
sion of  the  factors  determining  real  incomes,  except  as  it  is  found 


DISTRIBUTION   AS   AN   ECONOMIC   PROBLEM 


319 


that  certain  kinds  of  incomes  are  changed  more  readily  to  meet 
the  conditions  imposed  by  changes  in  prices  than  are  other  kinds 
of  incomes. 

It  is  obvious  that  one  person  may  be  the  recipient  of  more  than 
one  kind  of  income.  The  American  farmer  who  owns  the  land, 
buildings,  farm  machinery,  and  live  stock  that  make  up  his  pro- 
ductive equipment,  and  who  does  part  of  his  own  work,  is  at  the 
same  time  entrepreneur,  landlord,  capitalist,  and  laborer;  and 
his  income  is  made  up  of  different  proportions  of  profits,  rent, 
interest,  and  wages.  The  net  income  of  a  tenant  farmer,  utilizing 
only  borrowed  capital,  and  employing  only  hired  labor,  would,  on 
the  other  hand,  consist  entirely  of  profits.  The  economic  analysis 
that  seeks  to  determine  the  rules  governing  the  apportionment  of 
the  annual  dividend  under  the  categories  of  profits,  wages,  rent, 
and  interest,  bears  only  indirectly  upon  the  question  of  the  per- 
sonal distribution  of  wealth.  The  income  that  any  individual  re- 
ceives depends  primarily  upon  his  relative  efficiency  as  a  wage 
earner  or  as  an  entrepreneur,  or  upon  the  amount  and  the  in- 
come-yielding capacity  of  the  capital  and  land  which  he  owns. 
His  ownership  of  capital  and  land  may  have  come  about  through 
the  thrifty  husbanding  of  portions  of  his  income  in  previous  years, 
or  it  may  have  come  about  through  gifts  or  inheritance. 

Distribution  as  Valuation.  —  To  explain  the  value  which  society 
puts  upon  personal  services  is  to  explain  wages;  to  explain  the 
values  attached  to  the  use  of  land  and  capital  is  to  explain  rent  and 
interest.  Certain  special  and  distinguishing  characteristics  enter 
into  the  determination  of  each  of  these  three  kinds  of  value.  The 
conditions  governing  the  supply  of  labor  are,  for  example,  very 
different  from  the  conditions  governing  the  supply  of  land.  Yet 
there  are  some  fundamental  facts  that  are  the  same  for  all  of  these 
three  kinds  of  valuation.  The  most  important  of  these  common 
factors  is  the  law  of  diminishing  productivity. 

Assume  as  an  illustration  that  a  certain  farm  is  cultivated  by  a 
farmer  who  uses  only  his  own  labor,  together  with  a  certain  amount 
of  capital  in  the  form  of  draft  animals  and  agricultural  imple- 
ments. Let  us  assume  further  that  his  land  is  devoted  exclusively 
to  the  growing  of  one  crop,  —  corn,  for  instance.  His  money 


320 


OUTLINES    OF   ECONOMICS 


income  will  depend  on  the  amount  of  corn  he  can  produce  and  the 
prices  he  can  get  for  it.  If  prices  remain  constant,  he  can  increase 
his  income  only  by  increasing  his  product.  His  product  may  be 
increased  by  the  use  of  any  one  of  a  number  of  different  methods. 
In  the  first  place,  he  can  hire  a  farm  laborer  to  assist  him.  The 
two  men,  working  together,  will  undoubtedly  be  able  to  get  a 
larger  product  from  the  farm  than  one  man  could.  In  some  cases 
they  may  be  able  to  get  double,  or  even,  through  the  advantages 
of  cooperation,  more  than  double,  what  the  farmer  could  produce 
working  alone.  More  often,  perhaps,  the  employment  of  the  sec- 
ond man  will  not  double  the  total  product.  However  that  may 
be,  it  is  absolutely  certain  that  if  the  farmer  employs  a  third,  a 
fourth,  or  even  more  men,  he  will  sooner  or  later  reach  a  point 
where  it  will  be  found  that  the  employment  of  the  last  man  has 
not  increased  the  product  as  much  as  it  was  increased  by  the 
last  previous  laborer.  That  is,  the  addition  of  the  third  man  may 
not  have  increased  the  product  as  much  as  the  employment  of  the 
second  man  did,  or  the  fourth  man  may  not  have  increased  the 
product  as  much  as  the  third  man  did.  This  point  is  called 
the  point  of  diminishing  productivity,1  for  after  this  point  is  once 
reached  it  will  be  found  that,  save  under  the  most  exceptional 
conditions,  each  successive  additional  laborer  will  increase  the  ag- 
gregate product  by  an  amount  less  than  the  last  previous  laborer 
added  to  it.  This  fact  is  not  due  to  any  differences  in  the  laborers, 
whom  we  assume  to  be  of  equal  efficiency.  It  means  simply  that 
as  the  productive  possibilities  of  the  farm  with  its  equipment  of 
capital  become  more  fully  exploited  through  more  careful  tillage, 
it  requires  increasingly  greater  efforts,  in  the  form  of  still  more 
careful  and  thorough  tillage,  to  increase  the  product  by  a  given 
amount.  This  is  a  fact  of  such  common  observation  that  it  needs 
no  statistical  proof;  although  various  agricultural  experiment 
stations  have  made  records  of  the  effect  of  different  degrees  of 
thoroughness  of  cultivation  upon  the  yield  of  different  crops. 

1  In  some  economic  writings  what  is  here  called  "diminishing  productivity" 
is  termed  "diminishing  returns."  It  seems  preferable  to  reserve  the  latter  term 
for  its  more  familiar  application  to  the  phenomenon  of  the  increasing  costs  connected 
with  the  extension  of  agricultural  cultivation. 


DISTRIBUTION   AS   AN    ECONOMIC   PROBLEM 


32I 


One  might  imagine,  at  first  thought,  that,  after  the  point  of 
diminishing  productivity  had  been  reached,  it  would  not  pay  the 
farmer  to  hire  additional  laborers.  But  the  only  question  that 
directly  concerns  the  farmer  in  this  connection  is  whether  an  addi- 
tional laborer  will  "earn  his  wages,"  —  that  is,  whether  the  added 
product  will  sell  for  enough  to  cover  the  additional  expense  incurred 
for  wages.  It  will  pay  the  farmer  to  extend  his  employment  of 
labor  up  to  the  point  where  the  addition  of  another  laborer  to  the 
working  force  would  increase  the  product  by  an  amount  too  small 
to  sell  for  enough  to  pay  the  wages  of  the  laborer,  and  where  the 
deduction  of  a  laborer  from  the  working  force  would  decrease 
the  product  by  an  amount  at  least  sufficient  to  pay  the  wages  of 
the  laborer.  If  the  farmer  stops  short  of  this  point,  he  is  not  mak- 
ing all  the  possible  profits;  if  he  goes  beyond  it,  he  is  cutting 
down  his  profits  by  employing  labor  which  does  not  "earn  its 
wages."  The  last  laborer  employed  (not  necessarily  any  particu- 
lar laborer,  nor  the  last  in  point  of  time)  is  the  marginal  laborer, 
and  the  increase  in  the  total  product  attributable  to  the  marginal 
laborer  (the  part  which  would  be  lost  if  one  less  laborer  were  em- 
ployed) is  the  marginal  product  of  labor.  If  the  farmer  has  esti- 
mated product  and  prices  accurately,  it  will  be  found,  of  course, 
that  the  value  of  the  marginal  product  of  labor  will  be  approxi- 
mately equal  to  the  wages  of  the  marginal  laborer.  Or,  since  the 
laborers  are  supposed  to  be  of  equal  efficiency,  and  hence  to  re- 
ceive uniform  wages,  the  statement  may  be  put  in  the  broader 
and  more  significant  form  that  wages  and  the  marginal  product  of 
labor  will  tend  to  equal  each  other. 

The  diagrams  illustrate  the  principle  of  the  diminishing  productivity  of 
labor,  developed  in  the  foregoing  analysis.  In  Figure  i  the  rectangle  OM 
represents  the  amount  of  corn  that  the  farmer  could  raise  on  his  land  if  work- 
ing alone,  with  his  given  equipment  of  capital.  The  rectangle  AN  represents 
the  increase  in  the  product  effected  by  the  addition  of  another  worker.  Simi- 
larly, BP,  CQ,  DR,  and  £5  represent  respectively  the  additions  to  the  product 
resulting  from  the  employment  of  a  third,  fourth,  fifth,  and  sixth  laborer. 
If  DR  bushels  of  corn  —  the  increment  in  the  product  attributable  to  the  fifth 
laborer  —  sells  for  about  enough  to  pay  the  wages  of  one  laborer,  the 
farmer  will  refuse  to  employ  the  sixth  laborer,  while  the  employment  of  the 
fifth  would  be  a  matter  of  indifference.  If  the  fifth  laborer  were  employed, 
Y 


322 


OUTLINES   OF   ECONOMICS 


the  proceeds  of  the  sale  of  that  part  of  the  total  product  represented  by  the 
rectangle  OERH  would  be  used  up  in  the  payment  of  wages  (including  pay- 


p 

M 

w 

D 

/ 

\                  t 

5                   < 

Fic 

:              i 
;.  i 

3                    £ 

F 

ment  for  the  farmer's  own  work,  as  a  laborer),  while  the  part  of  the  product 
represented  by  the  small  rectangles  above  the  line  HW  would  be  left  to  rec- 
ompense the  farmer  for  the  use  of  his  land,  for  the  interest  on  and  wear  and 
tear  of  his  capital.  If  any  surplus  is  left  after  these  demands  are  satisfied,  it 
would,  of  course,  constitute  the  farmer's  profits.  If  the  conditions  were  as 

assumed,  the  fifth  la- 
borer would  be  the  mar- 
ginal laborer,  and  the 
product  represented  by 
the  rectangle  DR  would 
be  the  marginal  product 
of  labor. 

If  we  were  dealing  with 
a  very  large  undertaking, 
in  which  many  laborers 
are  employed,  the  succes- 
sive rectangles  represent- 
ing the  increments  in  the 
pIG  2  product  attributed  to  the 

hypothetical  addition  of 

successive  laborers  could  be  conceived  as  indefinitely  narrow,  so  that  the 
graphic  representation  would  take  the  form  represented  in  Figure  2,  where 
the  line  AM  is  located  at  the  point  of  diminishing  productivity,  and 
where  the  line  BN  represents  the  marginal  product  of  labor.  In  this 
case  the  rectangle  OBNH  represents  the  part  of  the  total  product  which 
will  just  suffice  to  pay  the  wages  of  all  the  laborers  employed. 


DISTRIBUTION   AS   AN    ECONOMIC    PROBLEM 


323 


Thus  far  we  have  supposed  that  the  farmer  is  content  to  get 
along  with  his  original  amount  of  land  and  capital,  and  to  increase 
his  product  by  means  of  an  increased  use  of  labor.  Other  pos- 
sibilities are,  of  course,  open  to  him.  It  might  happen  that  he 
would  be  content  to  do  without  additional  laborers,  using  instead 
an  increased  equipment  of  capital.  By  purchasing  more  draft 
animals,  more  labor-saving  machinery,  improved  fertilizers,  or 
possibly  by  installing  drains  or  irrigation  ditches,  as  the  case  may 
be,  he  may  be  able  to  raise  considerably  more  corn  than  he  could 
without  such  investments.  But  here,  again,  he  will  find  the  possi- 
bilities of  increasing  his  product  subject  to  the  same  limitations 
that  would  have  prevailed  had  he  increased  his  labor  force.  With 
a  team  of  horses  he  will  be  able  to  accomplish  more  than  he  could 
with  one  horse;  two  teams  of  horses  may  still  further  increase  the 
productivity  of  the  farm;  a  third  would  probably  be  of  very  little 
advantage,  and  a  fourth  team  still  less  useful.  So  with  invest- 
ments of  capital  in  other  forms:  the  law  of  diminishing  produc- 
tivity is  a  remorseless  physical  fact  which  the  farmer  has  to  reckon 
with.  But  the  concrete  form  in  which  the  problem  presents  itself 
to  him  is  this:  Will  a  further  investment  of  money  in  a  specific 
kind  of  capital  goods  pay  me  ?  Here  the  farmer  has  to  make  on 
the  one  hand  the  best  estimate  he  can  of  the  amount  which  the 
proposed  capital  goods  will  add  to  his  annual  product,  and  of  the 
probable  selling  value  of  the  increased  product.  On  the  other 
hand,  he  has  to  count  his  increased  annual  expenses.  These  will 
include  (i)  the  original  cost  of  the  additional  equipment,  divided 
into  annual  costs  according  to  its  probable  durability  (each  year's 
costs  being  properly  only  the  wear  and  tear,  or  "depreciation" 
attributable  to  that  year's  use);  (2)  the  maintenance  or  upkeep 
(including  such  things  as  ordinary  repairs  on  machinery  and  the 
cost  of  feeding  horses),  and  (3)  the  interest  on  the  investment  (what 
the  farmer  has  to  pay  if  he  borrows  the  necessary  funds  from 
some  one  else,  or  what  he  might  have  lent  his  money  for  to 
some  one  else  if  he  uses  his  own  funds).  Guided  by  these  esti- 
mates, the  farmer  will  naturally  increase  his  equipment  of  capital 
goods  so  far  as  the  returns  from  the  added  product  would  more 
than  suffice  to  cover  his  increased  costs.  Beyond  this  point  he 


324  OUTLINES   OF  ECONOMICS 

could  not  wisely  go.  The  last  increment  of  capital  —  which  just 
suffices  to  pay  for  itself  —  is  the  marginal  increment  of  capital, 
and  the  added  product  attributable  to  it  is  the  marginal  product  of 
capital. 

The  diagrams  portraying  the  operation  of  the  law  of  the  diminishing  prod- 
uctivity of  labor  will  serve  as  well  to  illustrate  the  diminishing  productivity 
of  capital.  Assuming  that  the  amount  of  land  and  the  amount  of  labor  to 
be  utilized  are  definite  in  quantity,  the  successive  rectangles  in  Figure  i  rep- 
resent the  increase  in  the  gross  product  attributable  to  each  of  successive 
increments  of  capital.  Figure  2  represents  the  same  conditions,  except  that 
each  increment  of  capital  is  assumed  to  be  indefinitely  small. 

If  (in  Figure  2)  BN  represents  the  marginal  product  of  capital,  the  whole 
return  imputed  to  capital  is,  of  course,  represented  by  the  rectangle  OBNH. 
The  area  above  the  line  H N  represents  the  part  of  the  product  which  is  avail- 
able for  rent  and  wages,  the  farmer's  profits  being  derived  from  any  surplus 
that  is  left  after  these  demands  are  satisfied. 

There  is  one  difficulty  in  the  foregoing  analysis,  however,  that  may  have 
been  noted  by  the  reader.  What  is  meant  by  an  "increment  of  capital"? 
In  the  case  of  labor  the  "increment  of  labor"  can  be  interpreted  as  the  labor 
of  one  man  (for  any  definite  period  of  time  that  may  be  chosen),  the  one  man 
being  assumed  (for  the  purpose  of  simplicity  in  the  analysis)  to  be  of  equal 
efficiency  with  all  others  constituting  the  labor  supply.  It  is  just  as  practicable, 
of  course,  to  assume  that  one  horse  is,  for  the  farmer's  purposes,  just  as 
efficient  as  another  horse,  that  only  one  kind  of  plow  is  available,  and  that 
one  bushel  of  fertilizer  is  exactly  like  any  other  bushel  of  fertilizer ;  but  this 
does  not  help  us  out  of  our  difficulty.  For  how  can  we  blend  horses,  plows, 
and  fertilizers  into  one  concept,  and  divide  them  into  "  increments  of  capital  "  ? 
One  way  of  getting  around  the  difficulty  is  to  think  of  the  capital  which  the 
farmer  combines  with  his  labor  and  his  land  in  terms  of  its  money  value.  In 
this  sense  an  increment  of  capital  might  be  a  dollar's  worth  of  capital,  or  ten 
dollars'  worth  of  capital,  without  reference  to  the  different  kinds  of  concrete 
production  goods  really  composing  it.  This  device  is  useful  for  some  purposes, 
but  it  obscures  the  fundamental  fact  that  capital  gets  its  value  from  its  ability 
to  secure  an  income  for  its  owner.  The  purpose  of  this  analysis  of  diminish- 
ing productivity  is  to  open  the  way  for  a  discussion  of  the  valuation  of  the 
services  of  land,  labor,  and  capital.  To  use  the  term  "  capital  "  in  the  sense 
of  capital  value  at  this  stage  in  the  discussion  would  only  lead  us  into  a  circular 
argument.  This  point  cannot  be  further  elaborated  here,  but  should  be 
kept  in  mind  by  the  reader  in  connection  with  the  discussion  of  interest  in  a 
subsequent  chapter.1  As  a  matter  of  fact  the  law  of  diminishing  productivity 

1  Professor  J.  B.  Clark  avoids  the  difficulty  here  discussed  by  using  the  term 
"capital"  in  a  sense  which  corresponds  neither  to  the  concrete  instruments  of  pro- 
duction that  make  up  capital  goods,  nor  to  the  value  of  these  capital  goods, 


DISTRIBUTION  AS  AN  ECONOMIC   PROBLEM          325 

holds  for  each  specific  kind  of  capital  that  the  farmer  uses.  For  example, 
imagine  that  the  farmer  is  limited  to  the  use  of  a  fixed  amount  of  all  forms  of 
capital  except  one,  —  horses,  for  instance.  Then  the  successive  rectangles  in 
Figure  i  would  represent  very  well  the  increments  of  product  gained  by  the 
use  of  additional  horses,  while  if  the  product  added  by  the  use  of  a  fifth 
horse  is  just  about  enough  to  pay  for  the  increased  expense,  the  rectangle  DR 
would  represent  the  marginal  product.  The  illustration  can,  by  a  similar 
process,  be  made  to  apply  to  any  other  kind  of  capital.  The  farmer  will 
normally  make  use  of  each  specific  kind  of  capital  up  to  the  marginal  point. 

A  third  way  of  increasing  his  product  is  also  open  to  the  farmer. 
He  may  think  it  wiser  to  get  along  with  his  original  equipment  of 
capital  and  his  own  labor,  and  to  increase  his  product  by  utilizing 
more  land.  The  adoption  of  this  procedure  would  mean  a  less 
intensive  cultivation  per  acre  of  land.  The  use  of  labor  and  capital 
would  have  to  be  distributed  more  thinly  over  the  larger  acreage. 
This  would  result  in  a  smaller  product  per  acre,  but  the  procedure 
would  be  warranted  if  the  increase  in  the  annual  product  should 
sell  for  more  than  the  annual  cost  of  the  additional  acreage.  By 
the  annual  cost  of  additional  land  we  mean  the  rent  which  the 
farmer  has  to  pay  for  the  land  if  he  leases  it,  or  the  interest  on  the 
amount  of  the  purchase  price,  if  he  buys  it.  It  is  obvious,  how- 
ever, that  the  combination  of  more  and  more  land  with  a  fixed 
amount  of  labor  and  capital  will  result  in  a  smaller  and  smaller 
return  per  acre  of  land,  and  that  a  point  will  soon  be  reached  be- 
yond which  it  will  not  pay  the  farmer  to  go.  In  other  words,  the 
law  of  diminishing  productivity  rules  when  land  is  considered  as 
the  variable  factor,  just  as  it  does  when  labor  or  capital  is  consid- 
ered as  the  variable. 

The  diagrams  already  used  may  be  adapted  to  the  illustration  of  the  present 
hypothesis  by  assuming  that  equal  areas,  if  successively  combined  with  a 
given  amount  of  labor  and  capital,  would  yield  increments  of  product  as 
represented  by  the  successive  rectangles  in  Figure  i,  or  by  the  curve  in  Fig- 
ure 2.  It  is  assumed  for  the  sake  of  simplicity  in  the  illustration  that  the  dif- 
ferent acres  of  land  available  for  the  farmer's  use  are  of  equal  fertility. 

but  as  denoting  a  self- perpetuating  fund  which  bears  the  same  relation  to  concrete 
production  goods  (including  land)  that  a  river  does  to  the  drops  of  water  of  which  it, 
at  a  given  time,  is  composed.  Professor  Clark  finds  this  concept  useful  in  his 
own  analysis  (cf.  his  Distribution  of  Wealth  and  Essentials  of  Economic  Theory), 
but  it  is  altogether  too  abstract  and  hypothetical  to  be  of  use  in  the  present  con- 
nection. 


326  OUTLINES   OF   ECONOMICS 

The  Actual  Operation  of  Diminishing  Productivity.  —  It  has 
been  assumed  thus  far  that  the  farmer  of  our  illustration  has  to 
be  content  with  a  fixed  quantity  of  two  of  the  three  factors  in 
production,  but  that  he  is  at  liberty  to  increase  his  use  of  the  third 
factor  up  to  the  point  where  the  maximum  profits  will  be  gained 
for  himself.  Assuming  in  turn  that  each  of  the  three  factors  in 
production  was  the  variable  one,  we  found  that  in  each  case  the 
law  was  the  same  —  maximum  profits  were  obtained  when  the 
product  added  by  the  last  increment  of  the  variable  factor  would 
sell  for  just  enough l  to  cover  the  increased  expense.  In  one  way, 
however,  this  assumption  does  not  correspond  with  the  facts. 
The  farmer  is  at  liberty  to  increase  his  products  by  increasing  his 
utilization,  not  only  of  any  one,  but  of  any  two,  or  all  of  the  three, 
factors  of  production.  He  may,  for  example,  purchase  more  draft 
animals  and  more  machinery,  employ  more  labor,  and  at  the  same 
time  acquire  more  land.  To  a  certain  extent  the  use  of  one  factor 
may  lessen  the  use  of  another  (as  in  the  case  of  labor-saving  ma- 
chinery and  labor).  More  often,  however,  the  reverse  is  true. 
The  acquisition  of  machinery  may  necessitate  the  use  of  more 
horses,  while  the  acquisition  of  more  land  will  often  make  profit- 
able the  use  of  more  labor  as  well  as  more  capital  —  a  fact 
which  is  itself  implied  in  the  law  of  diminishing  productivity. 
Although  the  employment  of  labor,  capital,  and  land  can  thus  be 
increased  simultaneously,  the  significance  of  the  law  of  diminish- 
ing productivity  is  in  no  wise  diminished.  The  farmer,  in  decid- 
ing upon  the  purchase  of  a  particular  kind  of  capital  good,  has  to 
take  into  account  his  present  and,  to  some  extent,  even  his  prob- 
able future  supply  of  other  kinds  of  capital  goods,  as  well  as  of 
land  and  labor,  before  he  can  form  a  judgment  as  to  the  amount 
which  the  use  of  the  particular  capital  good  will  add  to  his  annual 
product.  Moreover,  he  has  to  choose  between  additional  invest- 
ments in  labor  as  against  additional  investments  in  land,  or  ad- 
ditional investments  in  different  kinds  of  capital.  But  his  effort 
to  get  maximum  profits  will  lead  him  to  make  those  investments 

1  Whether  this  last  unit,  which  just  pays  for  itself,  will  be  added,  is,  of  course, 
a  matter  of  indifference.  The  margin  is  consequently  sometimes  called  the 
"margin  of  indifference." 


DISTRIBUTION  AS   AN   ECONOMIC    PROBLEM          327 

which  promise  to  result  in  the  greatest  additions  to  his  product. 
The  result  of  this  will  be,  normally,  that  each  factor  in  production 
will  be  utilized  up  to  the  marginal  point  —  the  point  where  further 
utilization  would  add  a  product  so  small  as  to  sell  for  less  than 
the  increased  expenses. 

Why  the  farmer  should  not  increase  his  product  indefinitely  by  increasing 
his  use  of  all  three  of  the  factors  in  production  is  a  question  which  does  not 
concern  us  in  this  connection.  The  law  of  diminishing  productivity  relates 
only  to  the  proportions  in  which  land,  labor,  and  different  forms  of  capital 
are  combined.  The  question  of  the  most  profitable  size  of  farm  is  quite 
another  thing.1 

It  is  not  only  in  agriculture  that  the  law  of  diminishing  produc- 
tivity is  the  fundamental  thing  in  determining  the  proportions  in 
which  the  factors  of  production  are  combined.  Every  manufac- 
turer has  the  option  of  using  either  relatively  more  machinery  and 
relatively  less  labor,  or  relatively  less  machinery  and  relatively 
more  labor  in  order  to  produce  a  certain  quantity  of  goods.  He 
may  have  to  decide,  also,  between  building  a  six-story  factory 
covering  an  acre  of  ground,  and  a  one-story  factory  covering  six 
acres  of  ground  —  a  problem  which  is  paralleled  by  the  farmer's 
problem  of  deciding  between  the  cultivation  of  a  relatively  large 
acreage  and  the  more  intensive  cultivation  of  a  smaller  acreage. 
The  entrepreneur  in  every  kind  of  undertaking  has  to  decide  as 
to  the  advisability  of  a  particular  investment  in  land,  capital,  or 
labor,  with  reference  to  the  fundamental  question,  "Will  it 
pay?"  And  the  profitableness  of  any  such  investment  is  always 
a  matter  of  the  cost  of  the  unit  of  land,  labor,  or  capital,  as  com- 
pared with  the  selling  value  of  the  quantity  which  it  will  add  to 
the  entrepreneur's  total  product. 

1  The  limitations  to  the  profitable  size  of  a  farm  or  other  business  unit  arise 
from  the  fact  that  the  managerial  efficiency  of  the  entrepreneur  is  itself  subject 
to  the  law  of  diminishing  productivity.  Under  competition  there  is  a  constant 
tendency  for  labor,  capital,  and  land  to  get  into  the  hands  of  those  entrepreneurs 
who  can  use  them  most  efficiently,  that  is,  who  can  pay  most  for  them  because  they 
can  get  the  largest  product  from  them.  But  even  if  A  is  a  better  entrepreneur  than 
B,  it  may  easily  happen  that  B  can  get  a  larger  product  from  additional  units  of 
labor,  capital,  and  land  than  A  can,  if  B's  existing  equipment  is  considerably 
smaller  than  A's.  A  given  farmer  cannot  extend  his  use  of  land,  labor,  and  capital 
indefinitely,  simply  because,  after  his  establishment  reaches  a  certain  size,  other 


328  OUTLINES   OF   ECONOMICS 

In  order  to  achieve  maximum  profits,  each  entrepreneur  will  en- 
deavor, so  far  as  is  practicable,  to  apportion  his  use  of  land,  labor, 
and  capital  so  that  the  value  of  the  increment  of  product  attributable 
to  the  marginal  unit  of  each  factor  in  production  will  about  equal 
its  expense. 

The  significance  of  the  law  of  diminishing  productivity  in  rela- 
tion to  the  distribution  of  wealth  now  becomes  apparent.  If  a 
given  class  of  laborers  in  a  given  employment  receive  like  wages, 
their  wages  (being  the  same  as  the  wages  of  the  marginal  laborer) 
will  tend  to  equal  the  marginal  product  of  labor.  The  expense 
incurred  by  the  entrepreneur  for  any  unit  of  a  certain  kind  of  capi- 
tal goods  will  tend  to  equal  the  value  of  the  marginal  product  of 
that  particular  kind  of  capital  goods.  The  rent  which  the  farmer 
will  pay  for  any  acre  of  a  quantity  of  land  of  uniform  quality  will 
tend  to  equal  the  value  of  the  marginal  product  of  land  of  that 
quality.  But  so  far  as  competition  works  freely,  different  entre- 
preneurs in  the  same  market  will  have  to  pay  the  same  wages  for 
the  same  kind  of  labor,  the  same  price  for  the  same  kind  of  capi- 
tal goods,  and  the  same  rent  for  the  same  kind  of  land;  and  they 
will  get  the  same  prices  for  the  same  kinds  of  products.  So  it  is 
possible  to  state  in  more  general  terms  that  the  remuneration  of 
each  factor  in  production  tends  to  equal  its  marginal  product.1 

farmers  can  use  additional  units  of  the  productive  factors  more  profitably  than  he 
can.  The  most  profitable  size  of  the  business  unit  will  vary,  other  things  being 
equal,  with  the  efficiency  of  the  entrepreneur. 

Some  writers  have  introduced  the  efficiency  of  the  entrepreneur  as  a  fourth 
variable  in  their  discussion  of  diminishing  productivity.  Such  a  procedure  is 
avoided  in  this  book,  because  it  leads  to  theoretical  complexities  and  because  it 
involves  a  shifting  of  the  point  of  view.  The  diminishing  productivity  of  each  of 
the  three  factors  in  production  is  a  physical  fact  which  every  entrepreneur  has  to 
deal  with,  and  which  we  can  explain  most  clearly  by  adhering  to  the  analysis  of 
the  motives  controlling  the  individual  entrepreneur.  The  analysis  of  the  dimin- 
ishing productivity  of  the  entrepreneur's  efficiency,  on  the  other  hand,  involves  of 
necessity  the  social  point  of  view,  for  the  only  kind  of  estimate  that  is  made  of  the 
entrepreneur's  productivity  is  expressed  through  the  social  process  of  the  valuation 
of  the  entrepreneur's  products.  In  this  book  the  diminishing  productivity  analysis 
is  applied  only  to  the  entrepreneur's  expenses  of  production,  the  entrepreneur 
being  regarded  (as  he  is  in  accounting  practice)  as  the  "residual  claimant." 

1  The  statement  that  rewards  tend  to  equal  products  has  no  ethical  significance, 
and  should  not  be  interpreted  as  a  justification  of  the  present  economic  order,  — 
and  this  for  the  following  reasons  among  others:  (i)  That  distribution  ought  to 


DISTRIBUTION   AS   AN   ECONOMIC   PROBLEM 


329 


It  is  not  necessary  for  the  validity  of  this  marginal  productivity 
theory  of  distribution,  as  it  is  called,  that  in  any  particular  under- 
taking at  any  given  time  the  proportions  in  which  the  factors  of 
production  are  actually  combined  should  be  adjusted  with  the 
nicety  which  the  theory  seems  to  imply.  The  amount  of  land  which 
the  farmer  holds  at  any  one  time  is  apt  to  be  fixed  by  his  estimate 
of  his  future  rather  than  of  his  present  production,  while  custom, 
pride  of  ownership,  and  the  chance  of  gain  through  an  increase 
in  land  values  (which  is  not  to  be  confused  with  the  motives  guid- 
ing his  activity  as  a  producer)  have  their  influence.  Moreover, 
the  size  of  the  government  homesteads  into  which  a  large  part  of 

be  according  to  productivity  is  itself  a  debatable  proposition.  Some  socialists, 
for  example,  maintain  that  distribution  according  to  needs  is  a  higher  ideal. 
(2)  The  ethical  side  of  the  problem  of  distribution  relates  to  personal  distribution, 
while  the  marginal  productivity  doctrine  relates  to  the  determination  of  the  in- 
comes going  to  the  different  factors  in  production.  To  state  that  the  rent  of  an 
acre  of  land  tends  to  equal  the  value  of  its  product  is  not  to  say  that  the  landowner 
has  "earned  "  his  income.  The  private  receipt  of  rent  depends  upon  such  social 
institutions  as  private  property,  inheritance,  and  free  contract,  and  these  have  to 
be  judged  from  the  broad  viewpoint  of  social  welfare.  (3)  The  efficiency  of  the 
individual  laborer,  which  is  one  of  the  things  determining  his  productivity,  often 
depends  upon  the  opportunity  he  has  had  to  "make  the  most  of  himself."  But 
opportunity  depends  largely  on  environment,  and  this  in  turn  is  to  a  large  extent 
amenable  to  social  control.  (4)  The  amount  of  the  marginal  product  of  any  one 
factor  in  production  is  itself  a  resultant  of  all  the  forces  affecting  the  supply  of  all 
the  factors  in  production  and  of  all  the  conditions  that  affect  their  fitness  to  serve 
in  the  production  of  the  things  that  consumers  are  demanding.  (5)  This  theory 
is  only  a  statement  of  a  normal  tendency.  It  does  not,  properly  understood! 
conflict  with  the  fact  that  such  things  as  custom  and  other  forms  of  economic 
friction  and  inertia,  the  higgling  of  the  market,  the  conscious  efforts  of  social  classes 
to  better  their  condition,  imperfections  in  the  monetary  system,  short-sighted 
selfishness  on  the  one  hand,  altruism  on  the  other,  as  well  as  the  conscious  social 
control  expressed  in  labor  legislation,  usury  laws,  and  the  like,  all  have  important 
effects  upon  the  incomes  actually  received  by  those  who  furnish  labor,  capital,  and 
land  for  the  work  of  production.  Actual  wages  may  differ  from  the  normal  wages 
measured  by  marginal  product  just  as  contractual  rent  may  differ  from  economic 
rent.  (6)  We  can  imagine  an  economic  order  very  different  from  the  present  one  in 
which  it  would  still  be  true  that  incomes  would  tend  to  equal  products.  If,  for 
example,  wages  were  arbitrarily  increased  50  per  cent  by  law,  while  one  result 
would  undoubtedly  be  an  increase  in  unemployment,  it  would  still  be  true  that 
wages  would  tend  to  equal  the  marginal  product  of  labor,  or,  rather,  that  the 
marginal  product  of  labor  would  tend  to  equal  wages.  To  attempt  to  avoid  this 
difficulty  by  assuming  that  the  present  order,  or  a  purely  competitive  order,  is  the 
"  natural "  order  of  things,  is  to  beg  the  whole  question  in  favor  of  the  existing 
status. 


330  OUTLINES    OF   ECONOMICS 

the  public  domain  was  divided  has  had  an  important  effect  on 
the  size  of  the  farmer's  holding  in  a  large  section  of  the  United 
States.  The  average  American  farmer  undoubtedly  holds  more 
land  than  he  would  if  he  were  looking  only  for  maximum  present 
profits.  The  practical  problem  for  him  is  apt  to  be  how  inten- 
sively he  shall  cultivate  it:  how  much  labor  and  capital  he  shall 
combine  with  it.  That  is,  he  is  apt  to  use  relatively  more  land 
and  relatively  less  labor  and  capital  than  he  would  use  if  every 
additional  acre  of  land  used  meant  an  additional  expense  for 
land.  This  conclusion  is  not  altered  by  the  fact  that  his  land  is 
probably  not  of  uniform  quality,  and  that  some  of  it  may  not  repay 
cultivation  under  present  conditions.  In  a  similar  way  the  manu- 
facturer builds  his  factory  for  the  future,  and  may  even  equip  it 
with  a  larger  complement  of  some  kinds  of  machines  (such  as 
boilers  and  engines)  than  present  requirements  justify.  On  the 
other  hand,  a  sudden  and  probably  temporary  increase  in  demand 
for  a  product  will  be  met  by  the  manufacturers  by  the  employ- 
ment of  more  labor  (even  at  the  high  rate  charged  for  overtime  or 
night  work)  rather  than  by  the  installation  of  more  labor-saving 
machinery,  even  though  the  latter  might,  in  the  long  run,  be  more 
economical.  In  general,  when  considerations  which  take  into 
account  a  period  of  years  dominate,  land  and  the  more  perma- 
nent forms  of  capital  goods  will  be  used  more  freely,  labor  and 
the  less  permanent  forms  of  capital  goods  less  freely.  When 
short-time  considerations  are  dominant,  the  reverse  will  be 
true. 

These  limitations  do  not  invalidate  the  law  of  the  equality  of 
the  remuneration  of  the  factors  in  production  and  the  value  of 
their  marginal  products  any  more  than  the  fact  that  a  feather 
does  not  fall  through  the  atmosphere  as  rapidly  as  a  stone  invali- 
dates the  law  of  gravitation.  This  law,  like  other  economic  laws, 
is  the  statement  of  a  fundamental  tendency,  which,  in  this  case,  is 
bound  up  with  the  universal  desire  of  entrepreneurs  to  get  for 
themselves  the  largest  possible  profits. 

Marginal  Productivity  and  Valuation.  —  The  reader  who  has 
firmly  grasped  the  concept  of  marginal  utility  will  find  that  a 
recognition  of  some  similarities  in  the  roles  which  marginal  utility 


DISTRIBUTION   AS   AN    ECONOMIC    PROBLEM 


331 


and  marginal  productivity  play  in  the  process  of  valuation  will 
help  him  to  grasp  the  significance  of  the  latter  concept.  The  value 
of  consumption  goods  is  determined  by  their  capacity  to  yield  an 
income  of  satisfactions;  the  value  of  production  goods  is  deter- 
mined by  their  capacity  to  yield  a  money  income  to  the  entre- 
preneur. In  the  one  case  the  law  of  diminishing  utility  is  domi- 
nant; in  the  other  case,  the  law  of  diminishing  productivity.  Just 
as  we  cannot  speak  of  the  utility  of  a  commodity  in  general,  but 
only  of  the  utility  of  particular  units  of  a  commodity,  so  we  can- 
not speak  of  the  productivity  of  land,  labor,  or  capital  in  general, 
but  only  of  the  productivity  of  particular  units  of  land,  labor,  and 
capital  —  a  productivity  which  is  attributed  or  imputed  to  other 
similar  units  of  the  supply  of  these  factors  in  production.  The 
consumer  is  getting  the  maximum  of  satisfaction  of  his  wants  when 
the  final  dollar  spent  for  one  commodity  satisfies  just  as  intense 
wants  as  the  final  dollar  spent  for  any  other  commodity,  and  he 
tends  to  apportion  his  expenditures  accordingly.  The  entrepreneur 
is  not  making  maximum  profits  if  his  final  expenditures  for  any 
one  of  the  factors  in  production  add  more  to  his  product  than  his 
final  expenditure  (of  equal  amount)  for  either  of  the  other  factors 
in  production,  and  he  tends  to  apportion  his  employment  of  land, 
labor,  and  capital  accordingly.  But  it  must  not  be  supposed  that 
the  statement  that  the  prices  paid  for  land,  labor,  and  capital  tend 
to  equal  the  value  of  their  marginal  products  is  a  complete  explana- 
tion of  the  valuation  of  the  services  of  the  factors  in  production 
any  more  than  the  principle  of  marginal  utility  is  a  complete  ex- 
planation of  the  valuation  of  consumption  goods.  In  fact,  from 
one  point  of  view,  marginal  productivity  is  itself  partly  deter- 
mined by  the  prices  which  the  entrepreneur  has  to  pay  for  the 
services  of  the  factors  in  production. 

The  demand  for  the  use  of  land,  labor,  and  capital  is  ultimately 
a  demand  for  their  products  —  the  goods  that  satisfy  human  wants. 
The  entrepreneur's  task  is  to  anticipate  and  meet  this  demand  — 
a  problem  that  takes  the  concrete  form  of  producing  goods  that 
will  sell  for  more  than  the  expense  of  production.  On  the  one 
hand  he  has  to  estimate  the  quantities  which  he  can  sell  at  certain 
prices;  on  the  other  hand,  he  has  to  take  account  of  the  quantities 


332  OUTLINES   OF  ECONOMICS 

which  various  units  of  land,  labor,  and  capital  will  contribute  to 
his  product,  together  with  the  prices  (wages,  rent,  and  interest) 
that  he  has  to  pay  for  these  units.  Through  his  mediation  the 
demand  of  society  for  want-satisfying  goods  becomes  a  demand 
for  the  services  of  certain  quantities  of  land,  labor,  and  capital, 
combined  in  certain  proportions.  And  the  principle  that  guides 
the  entrepreneur's  transformation  of  the  social  demand  for  the 
products  of  land,  labor,  and  capital  into  his  own  demand  for  the 
services  of  these  factors  in  production  is  the  principle  of  marginal 
productivity.  The  wages,  rent,  and  interest  that  are  actually  paid 
for  the  services  of  the  factors  in  production  are  the  resultants  of 
the, demand  of  entrepreneurs,  on  the  one  hand,  and  of  the  supply 
of  these  factors  on  the  other  hand.  The  principle  of  marginal 
productivity  is  an  illuminating  way  of  stating  the  problem  of  the 
distribution  of  wealth,  rather  than  a  solution  of  it.  Just  how  supply 
and  demand  operate  in  the  case  of  each  factor  in  production  is  a 
topic  to  be  considered  in  later  chapters. 

Social  Aspects  of  Diminishing  Productivity.  —  Since  the  entre- 
preneurs are  only  the  intermediaries  between  society  viewed  as  a 
body  of  consumers  and  society  viewed  as  a  body  of  producers,  we 
may,  for  present  purposes,  leave  them  out  of  consideration,  in 
order  to  fix  our  attention  upon  some  of  the  more  general  results 
of  the  fact  of  diminishing  productivity. 

If  the  number  of  laborers  within  the  boundaries  of  a  nation  is 
increased  by  immigration,  without  a  corresponding  increase  in 
capital  or  in  the  amount  of  land  available  for  use,  the  result  will  be 
an  increase  in  the  total  amount  of  goods  produced,  which  means 
an  increase  in  the  amount  of  wealth  produced  per  unit  c*  land  and 
capital,  but  (on  account  of  the  operation  of  the  law  of  diminishing 
productivity)  a  decreased  amount  per  laborer;  a  higher  marginal 
product  for  land  and  capital,  and  a  lower  marginal  product  for 
labor;  consequently,  higher  rent  and  higher  interest,  but  lower 
wages.  If  the  supply  of  capital  within  a  country  is  increased, 
while  labor  and  land  remain  constant,  the  result  will  be  higher 
wages  and  higher  rents,  but  a  smaller  remuneration  for  capital. 
Similarly,  if  the  available  supply  of  land  be  increased  (as  by  im- 
provements in  transportation  facilities),  rent  will  absorb  relatively 


DISTRIBUTION   AS   AN   ECONOMIC   PROBLEM          333 

less,  and  wages  and  interest  relatively  more,  of  the  value  of  the 
total  product. 

In  a  very  real  sense  the  same  laborer  is  more  productive  in  a 
country  where  land  is  relatively  plentiful  than  in  a  country  where 
land  is  relatively  scarce.  A  laborer  may  gain  no  technical  effi- 
ciency by  migration  from  Europe  to  America,  but  the  increment 
of  product  attributable  to  his  work  is  apt  to  be  considerably  larger 
in  the  United  States  than  it  was  in  Europe.  Here  he  really  creates 
a  larger  product  and  earns  a  larger  wage.  The  migrations  of 
labor  and  capital  from  one  region  to  another,  or  from  one  country 
to  another,  are  guided  by  the  endeavors  of  capitalists  and  laborers 
to  get  the  maximum  remuneration, —  which  will  always  be  found 
where  the  value  of  the  marginal  product  of  capital  or  labor  is  a 
maximum. 

In  a  prosperous  country  it  is  apt  to  be  the  case  that  the  supply 
of  labor  and  the  supply  of  capital  are  being  increased  simultane- 
ously, though  not  necessarily  with  equal  rapidity,  while  more  land 
is  at  the  same  time  being  made  available  through  improvements 
in  transportation.  Save  under  such  exceptional  conditions  of  rail- 
way building  as  have  prevailed  in  the  United  States  during  the 
past  fifty  years,  the  available  supply  of  land  is  apt  to  increase 
more  slowly  than  the  other  factors  in  production  increase.  In 
general,  the  law  of  diminishing  productivity  will  necessitate  a  con- 
tinual increase  in  the  proportion  of  the  product  set  aside  for  the 
remuneration  of  each  unit  of  the  most  slowly  increasing  factor  in 
production;  while,  of  the  other  two  factors,  the  one  that  increases 
more  rapidly  will  receive,  per  unit,  a  relatively  smaller  and  smaller 
proportion  of  the  value  of  the  total  product. 

QUESTIONS   AND   EXERCISES 

1.  Do  you  know  of  any  instances  where  the  distribution  of  wealth  has  been 
affected,  directly  or  indirectly,  by  conscious  social  action  ? 

2.  Prepare  tables  or  diagrams  illustrating  the  operation  of  the  law  of 
diminishing  productivity  in  some  industry  with  which  you  are  familiar. 

3.  Why  is  the  same  laborer  more  productive  in  America  than  in  Europe  ? 
Is  this  a  condition  that  will  probably  continue  indefinitely? 

4.  Why  do  lands  in  Belgium  produce  more  per  acre  than  similar  lands  in 
the  United  States? 


334  OUTLINES   OF   ECONOMICS 

5.  Why  are  twenty-story  office  buildings  not  erected  in  small  cities  ? 

6.  What  is  the  relation  of  the  discussion  in  this  chapter  to  the  socialist 
contention  that  labor  produces  all  wealth? 

REFERENCES 

CARVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  II. 
COMMONS,  J.  R.     The  Distribution  of  Wealth,  Chap.  III. 
FETTER,  F.  A.     The  Principles  of  Economics,  Chap.  IX. 
MARSHALL,  ALFRED.     Principles  of  Economics,  Vol.  I,  4th  ed.,  Book  VI, 
Chaps.  I  and  II. 


CHAPTER    XX 
THE    PERSONAL   DISTRIBUTION   OF   WEALTH 

IN  the  present  chapter  we  shall  study  the  distribution  of  wealth 
and  income  among  individuals  simply  as  individuals,  and  not  as 
factors  of  production.  What  is  the  cause  of  large  fortunes?  Is 
the  middle  class  disappearing?  Can  we  abolish  poverty?  In 
the  chapter  on  Consumption,  reference  has  been  made  to  the  ideal 
distribution  of  wealth,  —  here  we  shall  deal  chiefly  with  actual 
conditions.  But  to  begin  with,  certain  distinctions  must  be  clearly 
drawn. 

Wealth  and  Income.  — The  distribution  of  wealth  and  income 
should  be  distinguished.  If  we  have  in  mind  simply  the  enjoy- 
ment of  material  things,  then  we  must  pay  attention  to  the  distri- 
bution of  income.  A  man  of  vast  possessions  may  be  very  frugal 
in  his  consumption,  acting  with  respect  to  most  of  his  property 
simply  as  a  trustee  for  society.  But  when  we  are  interested  in 
social  classes,  industrial  democracy,  and  personal  power  and  inde- 
pendence, then  the  distribution  of  wealth  is  the  important  con- 
sideration. 

Absolute  and  Relative  Well-being.  — Two  entirely  independent 
inquiries  are  very  frequently  confused,  (i)  We  may  wish  to 
know  whether  the  condition  of  the  mass  of  the  people  is  getting 
better  or  worse.  Do  they  have  more  or  less  of  the  good  things  of 
life  than  their  ancestors  had?  But  we  may  also  ask,  (2)  What 
share  of  the  total  product  of  industry  is  received  by  each  section 
of  the  community?  Which  section  is  gaining  upon  the  others? 
If  A  and  B  divide  a  catch  of  ten  fish  equally  to-day,  and  if  to- 
morrow A  gets  ten  out  of  a  total  catch  of  thirty,  then  absolutely 
his  income  has  increased,  but  relatively  it  has  declined. 

Concentration  of  Wealth  and  Large-scale  Production.  —  It  is  per- 
haps worth  while  to  warn  the  reader  against  confusing  the  question 

335 


336 


OUTLINES   OF   ECONOMICS 


of  large  and  small  fortunes  with  the  question  of  large  and  small 
scale  production.  However  improbable,  it  is  at  least  conceivable 
that  there  might  be  an  equality  of  property  with  production 
carried  on  largely  as  it  is  to-day,  for  we  have  but  to  imagine  an 
equal  distribution  of  stock  holdings. 

Methods  of  measuring  Concentration  of  Wealth  and  Income.  — 
How  shall  we  tell  whether  the  middle  class  is  tending  to  disappear  ? 
A  common  method  is  to  make  a  classification  of  wealth  and  income, 
and  then  to  compare  the  number  of  persons  in  each  class  at  dif- 
ferent dates.  The  unreliability  of  the  conclusions  based  on  such  a 
procedure  is  made  clear  by  the  following  hypothetical  illustra- 
tion: Let  $100  be  distributed  among  ten  persons  as  follows: 
$i,  $3,  $5,  $7,  $9,  $11,  $13,  $15,  $17,  $19.  Then  suppose  each 
individual's  holding  is  doubled,  thus:  $2,  $6,  $10,  $14,  $18, 
$22,  $26,  $30,  $34,  $38.  Relatively  to  each  other  they  rare 
all  in  the  same  position  as  before,  but  by  the  erroneous  method 
of  comparison  referred  to,  there  appears  to  have  been  a  concen- 
tration because  the  number  in  the  highest  class  has  increased  most 
rapidly:  — 

TABLE  I 


CLASS 

NUMBER 

Dollars 

First  Case 

Second  Case 

o  and  less  than  5  

2 

3 

2 

3 

I 

I 
2 

6 

5  and  less  than  10  

ro  and  less  than  15  

15  and  over  .    .           .... 

A  satisfactory  method  of  comparing  the  distribution  of  wealth  at 
different  epochs  must  take  account  of  the  changing  significance  of 
fixed  classifications  when  there  has  been  a  change  in  the  per  capita 
wealth.  This  can  be  done  by  observing  what  proportion  of  the 
wealth  is  owned  by  certain  sections  of  the  population,  such  as  the 
poorest  third,  the  middle  third,  or  the  upper  third.  If  a  larger 
proportion  of  the  total  wealth  falls  into  the  hands  of  the  upper 
third,  we  may  say  there  is  evidence  of  a  growing  concentration  of 


THE  PERSONAL  DISTRIBUTION   OF  WEALTH 


337 


wealth.  It  is  clear  that  no  definite  movement  is  necessarily  dis- 
cernible even  when  changes  are  taking  place,  for  these  changes 
may  tend  toward  concentration  in  one  part  of  society  and  toward 
diffusion  in  another. 

Statistics  of  Distribution. — There  are  many  investigations 
showing  the  earnings  of  particular  classes  of  workers,  but  in  the 
United  States  there  is  no  reliable  statement  of  the  division  of  the 
national  wealth  or  income  among  all  classes  of  society.  We  could 
not  use  the  property  tax  assessments  for  this  purpose  because  of 
their  inaccuracy,  and  because  of  the  fact  that  one  individual  may 
be  taxed  in  various  jurisdictions.  The  returns  of  the  probate 
courts  have  been  used  as  a  basis  for  a  statement  of  wealth  distri- 
bution in  the  United  States  on  the  assumption  that  the  distribution 
of  wealth  among  persons  who  die  in  any  year  is  an  index  of  the 
distribution  of  wealth  among  those  who  are  living.  But  the  in- 
completeness of  our  probate  returns  make  this  method  also  a 
hazardous  one.  Such  statistics  as  we  have  do  not  enable  us  to 
say  more  than  that  a  small  proportion  of  the  population  at  the  top 
of  the  social  scale  controls  a  large  proportion  of  the  nation's  wealth, 
but  no  marked  tendency  either  toward  concentration  or  diffusion 
in  the  last  fifty  years  has  been  proved. 

The  growth  of  the  number  of  millionaires  has  been  used  as  an 
evidence  of  growing  wealth  concentration,  but  it  should  be  noted 
that  a  growth  of  population  and  wealth  in  a  community  would 
cause  an  increase  in  the  number  of  millionaires,  even  if  the  relation 
between  the  various  classes  remained  the  same.  Suppose  that  in 
1850  there  had  been  in  the  United  States  but  fifty  millionaires,  that 
three  hundred  and  fifty  persons  had  from  $750,000  to  $1,000,000, 
and  that  six  hundred  persons  had  from  $500,000  to  $750,000.  If 
the  population  had  remained  the  same  and  every  one's  wealth  had 
been  doubled,  in  1900  there  would  have  been  one  thousand  mil- 
lionaires, and  if  the  population  at  the  same  time  increased  fourfold, 
with  the  relations  among  the  new  population  the  same  as  in  the  old, 
we  should  then  have  four  thousand  millionaires  without  any  tend- 
ency toward  concentration.  Nevertheless,  the  increase  of  large 
fortunes  has  been  so  startling  that  in  spite  of  these  considerations 
one  may  perhaps  regard  them  as  an  indication  of  a  growing  con- 


OUTLINES   OF   ECONOMICS 


centration  of  wealth.  The  lists  of  very  rich  men  published  in  the 
United  States  from  time  to  time  are  instructive  on  this  point.  In 
1820  men  with  a  personal  property  of  $20,000  were  included;  in 
1846  a  total  property  of  $50,000  was  considered  very  large;  in 
1855  this  was  doubled;  in  1892  a  man  must  be  a  millionaire  to  be 
considered  very  rich,  and  at  present  one  may  speak  of  even  a 
billionaire. 

More  satisfactory  statements  can  be  made  for  those  countries 
which  collect  an  income  tax.  The  following  figures  are  from  a 
table  prepared  by  Professor  Wagner,  in  a  study  of  the  income-tax 
returns  of  Prussia :  — 

TABLE  II 

INCOMES  IN  PRUSSIA,  1892  AND  1902  * 


CLASSES  IN  DOLLARS 

PE«  CENT  OF  PERSONS 
(Heads  of  Families  or  Single 
Adults) 

PER  CENT  OF  INCOME 
(That  below  $214  is  estimated) 

Below  214  

214.—  714.  .  . 

1892 

1902 

1892 

1902 

78.18 
18.98 

2-33 
0.41 
0.08 

O.OI 

70.66 

2.88 
0.51 

O.IO 
O.O2 

41.21 

30.01 
12.8 

7-37 
4-65 

3-93 

32-97 
34-92 

!3-73 

7.84 

5-4° 

714-2261  
2261-7259.  ..  . 
7259-23800.  .. 
Over  23800  .  .  . 

Absolute  amounts 
(Total)  

Number 
11,162,000 

Number 
12,813,000 

Dollars 
2,309,076,000 

Dollars 
3,039,498,000 

1  From  Zeitschrift  des  Preussischen  Statistischen  Bureaus,  1904,  p.  231. 

The  great  mass  of  the  people  are  too  poor  to  pay  any  income  tax 
at  all,  the  minimum  income  taxed  being  $214.  The  upper  3.51 
per  cent  of  the  population  receives  about  one  third  the  total 
income,  but  in  connection  with  such  a  statement  it  should  be  said 
that  even  if  incomes  should  be  equally  distributed,  the  average 
income  per  family,  or  single  adults,  would  be  very  small  ($237  in 
1902).  With  a  very  moderate  inequality  in  distribution,  the  mass 
of  the  people  must  still  be  unable  to  pay  an  income  tax.  Thus, 
the  table  shows  as  much  the  niggardliness  of  nature  as  the  injustice 


THE   PERSONAL   DISTRIBUTION   OF  WEALTH 


339 


of  man  to  man.  From  1892  to  1902  there  seems  to  have  been  an 
absolute  increase  in  money  incomes  among  the  lowest  class  of  the 
people,  since  a  considerably  smaller  proportion  of  the  population 
is  found  in  the  class  with  incomes  below  $214  in  1902  than  in  1892. 
But  the  table  as  a  whole  shows  a  slight  tendency  toward  a  concen- 
tration of  incomes  in  the  hands  of  the  upper  classes. 

When  we  turn  from  the  question  of  relative  well-being  to  that  of 
the  actual  condition  of  each  class  taken  by  itself,  we  find  two  facts 
standing  put  prominently:  (i)  the  fruits  of  economic  progress 
have  not  been  confined  to  a  small  class,  but  have  been  shared  by 
the  masses,  and  (2)  a  surprisingly  large  section  of  the  population 
is  still  in  poverty. 

With  respect  to  the  first,  we  may  say  that  in  material  comforts 
the  people  of  this  generation  are  better  off  than  they  have  ever  been 
before.  The  work  of  settlement  in  which  so  many  of  our  fore- 
fathers engaged  was  laborious  and  exhausting.  Food  was  often 
scarce,  disease  was  rife  in  many  settlements,  and  the  women  and 
children  in  particular  suffered  greatly.  After  the  wilderness  was 
cleared,  there  ensued  a  period  of  "rude  plenty."  Food  was 
abundant,  but  it  was  coarse  in  quality  and  restricted  in  variety, 
whilst  everything  that  had  to  be  brought  from  a  distance  was  very 
expensive.  Education  was  difficult  to  secure,  books  scarce,  and 
the  lives  of  most  people  were,  in  the  main,  monotonous  and 
uneventful. 

The  course  of  wages  from  the  middle  of  the  eighteenth  century 
to  the  year  1905,  and  the  movement  of  prices  from  1860  to  the 
latter  date,  are  given  in  Table  III  following.  The  figures  are  not 
altogether  comparable,  nor  so  trustworthy  as  could  be  wished,  but 
the  general  impression  which  they  give  is  correct.  Speaking 
generally,  money  wages  have  steadily  risen,  and  the  hours  of  labor 
have  declined,  with  minor  interruptions,  since  the  colonial  period, 
while  prices  have  fluctuated  irregularly.  Taking  all  kinds  of  com- 
modities into  account,  the  level  of  prices  in  the  last  half  century 
has  probably  been  little  if  any  above  the  level  of  prices  in  the  first 
half  of  the  nineteenth  century.  The  standard  of  living  has  per- 
ceptibly risen,  and  the  working  classes  save  no  more,  possibly, 
than  they  did  several  generations  ago.  But  they  live  better. 


340 


OUTLINES   OF  ECONOMICS 


TABLE   III 


WAGES,  PRICES,  AND  HOURS  OF  LABOR 

WAGES,  PRICES,  AND  HOURS 

IN   i860   TAKEN  AS    IOO 

OF  LABOR  IN  1890  TAKEN 

AS    IOO 

DAY  LABORERS  IN 
MASSACHUSETTS  ' 

EMPLOYEES  IN  MANUFACTURING 
INDUSTRIES  —  EASTERN  STATES 

GENERAL  INDUSTRY,  EXCLUDING 
AGRICULTURE,  MINING,  AND 
TRANSPORTATION 

T?  ITT    1 

RELATIVE 

RELATIVE 

PERIOD 

Ix  ILLA- 
TIVE 

YEAR 

Cost 

Hours 

YEAR 

Hours 

WAGES 

Wages  « 

of 

of 

Wages  < 

Prices  s 

of 

Living  ' 

Labor' 

Labor6 

1752-60 

•29 

1860 

IOO 

IOO 

IOO 

1881 

95-3 

"4-5 

I°3 

1761-70 

•325 

1861 

IOO 

III 

99.1 

1882 

96.9 

II7-5 

103 

1771-80 

•376 

1862 

IOO 

123 

98.2 

1883 

97-7 

114.8 

I03 

1781-90 

.428 

1863 

109 

137 

98.2 

1884 

98-5 

107.7 

I°3 

1791-00 

.623 

1864 

1  20 

I63 

98.2 

1885 

97-8 

100.8 

103 

1801-10 

.817 

1865 

141 

175 

97-3 

1886 

97.8 

99.6 

IO2 

1811-20 

.910 

1866 

J53 

172 

98.2 

1887 

98.6 

100.3 

IOO 

1821-30 

.796 

1867 

172 

164 

98.2 

1888 

99-2 

102.  1 

IOO 

1831-40 

.872 

1868 

167 

I65 

96.4 

1889 

99.6 

IO2.I 

IOO 

1841-50 

.852 

1869 

174 

I63 

96.4 

1890 

IOO.O 

IOO.O 

IOO 

1851-60 

•975 

1870 

J75 

157 

95-5 

1891 

99-7 

101.4 

99-8 

1871 

178 

148 

95-5 

1892 

100.3 

99-5 

99.8 

1872 

i74 

147 

95-5 

1893 

IOO.  2 

IO2.O 

99.6 

1873 

i?S 

149 

95-5 

1894 

96.7 

97-4 

99.1 

1874 

170 

145 

95-5 

1895 

97-4 

95-5 

99-4 

1875 

161 

141 

93-6 

1896 

98-5 

93-3 

99.1 

1876 

156 

J34 

93-6 

1897 

98.2 

94.0 

98.9 

1877 

146 

I31 

93-6 

1898 

99.0 

96.4 

99  -o 

1878 

142 

126 

93-6 

1899 

IOO.  2 

97-2 

98-5 

1879 

140 

123 

93-6 

1900 

I03.I 

98.7 

98.0 

1880 

137 

125 

93-6 

1901 

104.8 

102.7 

97-4 

1902 

108.2 

108.3 

96.6 

J9°3 

III.  2 

107.7 

95-9 

1904 

III.  I 

109.1 

95-2 

*9°S 

II2.8 

109.8 

95-2 

1  Data  from  Report  of  Massachusetts  Bureau  of  Statistics  of  Labor  for  1885,  p.  455. 

1  Data  from  Mitchell,  Gold,  Prices,  and  Wages  under  the  Greenback  Standard,  pp.  242-244. 
The  cost  of  living  here  is  based  upon  retail  prices  and  covers  rent  as  well  as  food,  etc. 

3  Based  upon  statistics  covering  21  industries  given  in  the  Aldrich  Report  on  Wholesale 
Prices,  Wages,  and  Transportation. 

*  Statistics  for  1881-1889  cover  25  city  occupations,  and  are  based  upon  data  given  in  Bul- 
letin of  the  Bureau  of  Labor,  No.  18,  p.  669.  Statistics  for  1800-1905  cover  349  occupations, 
and  are  based  upon  data  given  in  Bulletin  of  the  Bureau  of  Labor,  No.  65,  p.  20. 

'Wholesale  prices  from  1881  to  1889,  based  upon  data  given  in  the  Aldrich  Report  on 
Wholesale  Wages,  Prices,  and  Transportation,  Part  I,  p.  99.  Retail  prices  of  food  from  1890 
to  1005,  from  the  Bulletin  last  cited. 

6  From  the  Aldrich  Report  and  Bulletin  cited  above.  After  1890,  statistics  are  based  on 
hours  of  labor  per  week. 


THE   PERSONAL  DISTRIBUTION   OF  WEALTH        341 

Regarding  the  second  proposition,  we  may  say  that  reliable 
English  investigations  show  that  more  than  one  fourth  of  the  popu- 
lation of  the  cities  of  London  and  York  are  below  the  poverty  line. 
To  be  sure,  it  is  not  easy  to  determine  definitely  how  poor  a  person 
must  be  in  order  to  be  "in  poverty,"  but  the  statement  just  made 
is  based  upon  standards  that  are  undeniably  conservative.  But 
a  number  of  those  actually  in  poverty  have  enough  income  to  pur- 
chase the  minimum  physical  requirements  if  they  knew  how  to 
spend  their  money  wisely.  In  the  city  of  York  9.91  per  cent  of 
the  population  had  insufficient  earnings  for  minimum  require- 
ments estimated  at  $5.25  per  week  for  a  family  of  five.  This 
minimum  is  very  low,  and  it  is  easily  within  the  mark  to  say  that 
at  least  a  fifth  of  the  population  of  York  did  not  have  in  1899  a 
sufficient  income  for  a  decent  existence.  In  the  United  States 
the  proportion  of  the  urban  population  below  the  poverty  line  is 
probably  somewhat  less,  but  reliable  statistics  cannot  be  quoted. 

A  recent  writer  has  estimated  that  ten  million  persons  in  the 
United  States  are  in  poverty,  not  all  in  distress,  but  "much  of  the 
time  underfed,  poorly  clothed,  and  improperly  housed."  The 
estimate  is  based  on  statistics  of  unemployment,  returns  of  boards 
of  charity,  court  records  of  evictions,  and  pauper  burials.  What- 
ever the  actual  figures  may  be,  they  would  doubtless  be  startling 
in  comparison  with  statistics  of  our  industrial  progress. 

Causes  of  Poverty  and  Riches.  —  The  explanations  of  poverty 
and  riches  may  be  divided  into  two  classes :  (i)  those  that  empha- 
size individual  responsibility,  and  (2)  those  that  emphasize  social 
responsibility.  According  to  the  first,  a  comfortable  fortune  is  the 
reward  of  efficiency,  and  poverty  the  penalty  of  inefficiency.  To 
find  fault  with  existing  wealth  distribution,  it  is  alleged,  is  to  find 
fault  with  nature  for  making  individual  differences  in  ability  so 
enormous.  That  there  are  idle  and  worthless  persons  among  the 
rich  is  not  to  be  denied,  but  they,  it  is  said,  are  to  be  regarded  as 
the  exceptions.  As  a  class,  according  to  this  view,  the  rich  add 
more  to  the  wealth  of  society  than  they  consume,  and  they  do  not 
in  reality  deduct  anything  from  the  income  of  the  lower  classes. 

Those  who  emphasize  the  second  explanation,  on  the  other  hand, 
point  to  the  existence  of  all  sorts  of  special  privileges  which  enable 


342  OUTLINES   OF  ECONOMICS 

the  few  to  levy  toll  on  the  commerce  of  the  nation.  They  assert 
that  the  fortunes  of  most  millionaires  originated  under  the  shelter 
of  some  monopolistic  enterprise.  As  to  the  poor,  they  call  atten- 
tion to  the  fact  that  inefficiency  may  be  the  result  of  poverty  as 
well  as  the  cause  of  it.  Society  must,  therefore,  take  active  meas- 
ures to  better  the  environment  of  the  poor.  They  must  be  taught 
to  live  wisely,  and  their  children  must  be  given  a  fair  chance  in  life. 
Children  who  do  not  get  enough  to  eat  when  young  cannot  be  ex- 
pected to  take  care  of  themselves  when  they  are  men  and  women. 

"The  prime  importance  of  monopoly  privileges  in  the  distribution  of 
wealth  is  shown  by  the  results  of  the  investigation  of  the  New  York  Tribune 
(1892)  in  its  efforts  to  ascertain  the  sources  of  the  fortunes  of  the  millionaires 
of  the  United  States.  That  investigation  was  undertaken  to  show  that  the 
system  of  protection  has  not  been  the  main  cause  for  monopolies  and  great 
fortunes.  The  investigation  amply  demonstrated  this  proposition.  Of 
the  4047  millionaires  reported,  only  1125,  or  28  per  cent,  obtained  their 
fortunes  in  protected  industries.  The  following  partly  estimated  summaries 
are  based  on  the  Tribune  report.  They  show  that  about  78  per  cent  of  the 
fortunes  were  derived  from  permanent  monopoly  privileges  and  only  21.4 
per  cent  from  competitive  industries  unaided  by  natural  and  artificial  monopo- 
lies. Yet  there  can  be  no  question  that  if  these  21.4  per  cent  were  fully 
analyzed,  it  would  appear  that  they  were  not  due  solely  to  personal  abili- 
ties unaided  by  these  permanent  monopoly  privileges.  They  were  mostly 
obtained  from  manufactures,  and  five  sixths  of  the  manufactures  of  the 
country  are  based  on  patents.  Besides,  fortunate  investments  in  real  estate, 
stocks,  etc.,  have  often  contributed  to  fortunes  where  they  do  not  appear 
prominently.  Furthermore,  if  the  size  of  the  fortunes  is  taken  into  account, 
it  will  be  found  that  perhaps  95  per  cent  of  the  total  values  represented 
by  these  millionaire  fortunes  is  due  to  those  investments  classed  as  land 
values  and  natural  monopolies  and  to  competitive  industries  aided  by  such 
monopolies."  * 

Those  who  take  this  second  view  do  not  deny  that  individual 
differences  in  ability  exist  and  are  a  cause  for  a  difference  in  for- 
tune. But  they  think  that  conditions  are  such  that  differences  in 
reward  are  quite  out  of  proportion  to  the  difference  in  ability.  A 
little  shrewdness  may  accumulate  a  fortune  just  as  the  touch  of  a 
child's  hand  may  start  a  bowlder  down  the  mountain  side.2 

The  controversy  as  to  the  ultimate  responsibility  for  poverty 

1  Commons,  The  Distribution  of  Wealth,  p.  252. 

2  The  relation  of  competitive  wages  to  efficiency  is  discussed  in  Chapter  XXII. 


THE   PERSONAL   DISTRIBUTION    OF  WEALTH        343 

cannot  be  settled  by  an  appeal  to  the  results  of  the  investigations 
that  have  been  made  as  to  the  immediate  causes  of  poverty.  The 
investigation  in  the  city  of  York,  before  referred  to,  gives  the  fol- 
lowing as  to  the  immediate  causes  of  primary  poverty,  that  is, 
where  the  income  was  insufficient  to  provide  the  minimum  re- 
quirements for  physical  efficiency  even  if  wisely  spent:  — 

TABLE  IV 
IMMEDIATE  CAUSES  OF  "  PRIMARY  "  POVERTY  l 


PER  CENT  OF  POPULATION 
m  POVERTY 


Death  of  chief  wage  earner 

Illness  or  old  age  of  chief  wage  earner 

Chief  wage  earner  out  of  work 

Irregularity  of  work ;    

Largeness  of  family,  i.e.  more  than  four  children . 
In  regular  work  but  at  low  wages 


S-" 
2.31 

2.83 
22.16 
51.96 


1  Rowntree,  Poverty,  p.  120. 

Is  Greater  Diffusion  Possible? — Most  people  agree  that  a 
greater  equality  of  possessions  would  be  desirable  if  it  could  be 
brought  about  without  any  confiscation  of  the  real  earnings  of  the 
more  efficient  members  of  society.  The  idea  of  a  leisure  class 
whose  mission  is  to  further  culture  without  great  contribution  to 
the  production  of  what  it  consumes,  does  not  find  much  favor  in 
this  democratic  age.  The  disadvantages  of  wide  extremes  in 
wealth  have  been  so  often  pointed  out  by  social  philosophers  that 
they  need  not  be  emphasized  here.  But  those  who  believe  that 
the  competitive  system  roughly  apportions  rewards  according  to 
individual  production  will  say  that  nothing  can  be  done  directly  to 
diffuse  wealth.  That  each  individual  should  bear  the  consequences 
of  his  own  conduct,  they  think  is  necessary  as  a  discipline  for  the 
race.  "  Give  the  children  of  the  shiftless,  by  thoughtless  charity 
or  various  systems  of  poor  relief,  the  right  to  eat  the  substance  of 
the  efficient  and  the  prudent,  and  you  will  soon  lose  both  the 


344  OUTLINES   OF   ECONOMICS 

capital  and  the  morality  under  which  that  capital  has  been  cre- 
ated," l  says  a  writer  of  this  class. 

Those,  on  the  other  hand,  who  think  that  something  can  and 
should  be  done  directly,  question  the  possibility  of  discovering  the 
separate  productivity  of  workers  under  modern  complex  indus- 
trial conditions  with  any  degree  of  exactness,  and  think  there  is 
little  danger  of  discouraging  industry  and  thrift.  If  the  highest 
incomes  were  $100,000  per  year,  men  would  struggle  just  as  hard 
as  they  do  now  to  get  into  the  highest  class. 

If  we  take  the  view  that  something  can  be  done  to  lessen  the 
extreme  inequality  in  wealth  distribution  that  exists  at  the  present 
time,  it  is  necessary  to  formulate  some  programme  of  social  re- 
form. In  framing  such  a  programme  it  must  be  remembered,  on 
the  one  hand,  that  the  right  of  private  property  is  not  an  abso- 
lute right.  No  one  has  a  vested  interest  in  that  institution,  and  we 
are  at  liberty  to  make  such  modification  in  the  institution  as  will 
contribute  to  the  social  welfare.  For  the  present  the  measures  here 
advocated  are  not  in  the  slightest  danger  of  being  carried  so  far  as 
to  discourage  that  wealth-getting  ambition  which  is  considered  by 
many  to  be  essential  to  progress.  On  the  other  hand,  there  is 
danger  of  injuring  by  wrong  methods  the  very  persons  whom  it  is 
desirable  to  elevate.  Indiscriminate  charity  may  convert  poverty 
to  pauperism. 

"This  distinction  between  the  poor  and  the  paupers  may  be  seen  every- 
where. There  are,  in  all  large  cities  in  America  and  abroad,  streets  and  courts 
and  alleys  where  a  class  of  people  live  who  have  lost  all  self-respect  and 
ambition,  and  who  rarely  if  ever  work,  who  are  aimless  and  drifting,  who  like 
drink  and  who  have  no  thought  for  their  children,  and  who  live  aimless  and 
contentedly  on  rubbish  and  alms.  ...  In  our  American  cities,  Negroes, 
Whites,  Chinese,  Mexicans,  Half-breeds,  Americans,  Irish,  and  others  are 
indiscriminately  housed  together  in  the  same  tenements  and  often  in  the 
same  rooms.  The  blind,  the  crippled,  the  consumptive,  the  aged,  —  the 
ragged  ends  of  life;  the  babies,  the  children,  the  half -starved,  underclad 
beginnings  in  life,  all  huddled  together,  waiting,  drifting.  This  is  pauper- 
ism. There  is  no  mental  agony  here;  they  do  not  work  sore;  there  is  no 
dread ;  they  live  miserable,  but  they  do  not  care. 

"  In  these  same  cities,  and  indeed  everywhere,  there  are  great  districts  of 
people  who  are  up  at  dawn,  who  wash  and  dress,  and  eat  breakfast,  kiss 
1  Hadley,  Economics,  p.  49. 


THE   PERSONAL   DISTRIBUTION   OF   WEALTH 


345 


wives  and  children,  and  hurry  away  to  work  or  to  seek  work.  The  world 
rests  upon  their  shoulders ;  it  moves  by  their  muscle ;  everything  would  stop 
if  for  any  reason  they  should  decide  not  to  go  into  the  fields  and  factories  and 
mines.  But  the  world  is  so  organized  that  they  gain  enough  to  live  upon 
only  when  they  work ;  should  they  cease,  they  are  in  destitution  and  hunger. 
The  more  fortunate  of  the  laborers  are  but  a  few  weeks  from  actual  distress 
when  the  machines  are  stopped.  Upon  the  unskilled  masses  want  is  con- 
stantly pressing.  As  soon  as  employment  ceases,  suffering  stares  them  in 
the  face.  They  are  the  actual  producers  of  wealth,  but  they  have  no  home 
nor  any  bit  of  soil  which  they  can  call  their  own.  They  are  the  millions  who 
possess  no  tools  and  can  work  only  by  permission  of  another.  In  the  main 
they  live  miserably,  they  know  not  why.  They  work  sore,  and  yet  gain  noth- 
ing. They  know  the  meaning  of  hunger  and  the  fear  of  want.  They  love 
their  wives  and  children.  They  try  to  retain  their  self-respect.  They  have 
some  ambition.  They  give  to  neighbors  in  need,  yet  they  are  themselves  the 
actual  children  of  poverty."  * 

We  shall  not  discuss  here  the  methods  of  alleviating  the  suffer- 
ing that  comes  from  poverty.  The  best  methods  of  charitable 
relief  are  necessary  as  palliatives,  but  they  cannot  cure  the  evils  of 
poverty.  Two  classes  of  reform  measures  should  be  distinguished : 
(i)  those  that  aim  to  alter  the  methods  of  wealth  acquisition  in  the 
future,  and  (2)  those  that  aim  to  diffuse  the  excessive  accumu- 
lations of  the  past. 

Modifying  the  Methods  of  Wealth  Acquisition.  —  These  methods 
again  fall  into  two  classes :  (a)  prevention  of  improper  methods  of 
wealth  accumulation;  (b)  eliminating  or  strengthening  the  in- 
efficient members  of  society.  Under  the  first  of  these  falls  the 
problem  of  reducing  to  lower  terms  such  incomes  as  are  indi- 
vidually unearned.  There  must  be  such  control  of  monopolistic 
privileges  as  to  keep  them  from  being  the  means  of  exploiting  the 
masses.  Fraud  and  favoritism  must  be  eliminated  so  that  income 
shall  not  be  wholly  out  of  proportion  to  service  or  needs. 

The  second  class  includes  a  large  variety  of  methods,  (i)  It  is 
possible  to  do  something  to  prevent  defective  human  beings  from 
being  born.  There  is  a  growing  sentiment  in  favor  of  preventing 
the  marriage  of  persons  who  are  not  fit  for  marriage.  No  indi- 
vidual would  be  deprived  of  any  important  right  if  a  medical  cer- 
tificate of  good  health  were  made  a  condition  precedent  to  the 

1  R.  Hunter,  Poverty,  pp.  3-5. 


346  OUTLINES   OF  ECONOMICS 

granting  of  a  marriage  license.  (2)  Education  should  be  made 
compulsory  with  the  endeavor  of  making  the  rising  generation 
not  only  efficient  producers  of  wealth,  but  also  wise  spenders  of 
what  they  receive.  (3)  It  is  possible  to  provide  against  the  mis- 
fortunes of  life  by  insurance  of  various  kinds.  If  men  will  not 
voluntarily  make  provision  for  themselves  and  for  those  dependent 
upon  them  in  cases  of  sickness,  accident,  old  age,  and  premature 
death,  they  should  be  helped  to  do  so  indirectly  by  some  com- 
prehensive system  of  workingmen  's  insurance  and  old  age  pen- 
sions. (4)  The  solution  of  the  problem  of  unemployment  depends 
upon  more  indirect  measures,  such  as  monetary  and  banking 
reform,  which  steady  the  progress  of  industry,  although  European 
experiments  show  that  there  are  possibilities  in  insurance  against 
unemployment.  (5)  Opportunities  for  saving  should  be  multi- 
plied. The  establishment  of  postal  savings  banks  would  be  of 
some  assistance.  (6)  The  health  and  vigor  of  the  people  should 
be  improved  by  sanitation  and  by  legislation  which  improves  the 
conditions  of  work. 

The  Diffusion  of  Wealth.  —  To  some  extent  large  fortunes  dis- 
appear without  governmental  interference,  but  it  takes  com- 
paratively slight  ability  to  maintain  an  inherited  estate.  It  does 
not  seem  practicable  or  desirable  to  limit  directly  the  total  amount 
of  wealth  which  a  man  may  own,  but  there  is  no  reason  why  the 
government  should  refrain  from  consciously  encouraging  the  dif- 
fusion of  wealth.  The  regulation  and  taxation  of  inheritances 
seems  to  be  the  proper  remedy  in  this  connection,  even  if  its  action 
is  somewhat  slow. 

QUESTIONS  AND  EXERCISES 

1.  Can  anything  be  said  in  favor  of  a  leisure  class? 

2.  Would  Mr.  Carnegie's  plan  of  levying   an  inheritance  tax  of  50  per 
cent  destroy  the  incentive  to  work? 

3.  Explain  the  various  systems  of  poor  relief. 

4.  Describe  the  German  system  of  compulsory  insurance. 

5.  Describe  the  old  age  pension  system  in  Australia. 

6.  What  objections  have  been  offered  against  postal  savings  banks  ? 

7.  Discuss  the  following  statement :    "  We  have,  then,  little  reason  for 
expecting  that  the  prevailing  insecurity  in  the  lot  of  the  modern  workman 
will  ever  be  removed  by  the  development  of  individual  thrift."  —  A.  S.  JOHN- 
SON, Political  Science  Quarterly,  Vol.  XXII,  p.  244. 


THE   PERSONAL  DISTRIBUTION   OF  WEALTH        347 

REFERENCES 

ADAMS,  T.  S.,  and  SUMNER,  H.  L.     Labor  Problems,  Chap.  V. 

BROOKS,  J.  G.     The  Social  Unrest,  Chap.  VII. 

BOOTH.     Life  and  Labour  of  ttie  People  in  London,  final  volume. 

CANNAN,  EDWIN.     "Division  of  Income,"  Quarterly  Journal  of  Economics, 

Vol.  19,  p.  341. 

COMMONS,  J.  R.     Distribution  of  Wealth,  pp.  252  sqq. 
DEVINE,  E.  T.     Principles  of  Relief. 

ELIOT,  C.  W.     "  Great  Riches,"  World's  Work,  Vol.  n,  p.  7451. 
ELY,  R.  T.     Evolution  of  Industrial  Society,  Chap.  VI,  Part  I. 
HADLEY,  A.  T.     Economics,  pp.  39-63  and  330-335. 
HUNTER,  ROBERT.     Poverty. 
HOBSON   J.  A.     The  Social  Problem,  Chap.  IV,  and  Problems  of  Poverty, 

Chap.  IX. 

HENDERSON,  C.  R.     Modern  Methods  of  Charity. 
JOHNSON,  A.  S.     "Influences  affecting  the  Development  of  Thrift,"  Political 

Science  Quarterly,  Vol.  XXII,  No.  2. 
LONDON,  JACK.     The  People  of  the  Abyss. 

LAUGHLIN,  J.  L.     "Large  Fortunes,"  Atlantic  Monthly,  Vol.  96,  p.  40. 
MALLOCK,  W.  H.     "  Great  Fortunes  and  the  Community,"  North  American 

Review,  Vol.  183,  p.  349. 

Paupers  in  Almshouses,  1904.     Special  Report  of  the  Bureau  of  the  Census. 
ROWNTREE.     Poverty,  A  Study  in  Town  Life. 
SPARGO,  JOHN.     Socialism,  Chap.  V. 

SPAHR,  C.  B.     The  Present  Distribution  of  Wealth  in  the  United  States. 
SEAGER,  H.  R.     Outline  of   a  Program  of  Social  Reform,  Charities  and 

the  Commons,  February  2,  1907. 
WARNER,  A.  G.     American  Charities. 
WATKINS,  G.  B.     "The  Growth  of  Large  Fortunes,"  Publications  of  the 

American  Economic  Association,  November,  1907. 
YOUNGMAN,   ANNA.     "The   Fortune  of  John  Jacob   Astor,"   Journal  of 

Political  Economy,  June,  1908. 


CHAPTER    XXI 
THE  RENT   OF   LAND 

RENT  is  the  price  paid  for  the  services  of  land.  In  common 
usage  the  meaning  of  the  word  is,  however,  much  less  exact. 
That  which  one  pays  for  the  use  of  durable  goods  of  any  kind 
owned  by  another  is  commonly  called  rent.  The  payment  for 
the  use  of  a  house  or  a  business  building  is,  for  example,  counted 
as  rent.  We  shall  see  that  in  this  case  the  so-called  rent  really 
consists  of  two  elements, — one  a  ground  rent,  or  rent  proper,  the 
other  capital  rent,  or  what  we  shall  call  gross  interest.  If  this 
distinction  seems  fanciful,  it  is  only  because  we  are  accustomed 
to  see  the  two  united  under  one  ownership.  But  in  most  large 
cities  separate  ownership  is  common.  Sometimes  one  man  owns 
the  land  and  leases  it  for  a  long  term  of  years  to  another  who 
erects  buildings  upon  it,  which,  either  with  or  without  payment, 
become  the  property  of  the  landowner  at  the  expiration  of  the 
lease,  unless  it  is  renewed,  and  if  it  is  renewed,  the  one  who  pos- 
sesses the  building  must  frequently  pay  for  it.  Often,  however, 
the  separation  in  ownership  is  a  permanent  one,  the  house  owner 
paying  perpetually  an  annual  sum  for  the  use  of  the  ground. 
This  is  the  case  in  Baltimore,  for  example,  where  ground  rents 
are  an  important  feature  in  the  economic  life  of  the  city.  In 
such  cases  the  two  kinds  of  income  are  very  clearly  distinguished. 

Some  modern  economists  have  extended  the  meaning  of  both 
rent  and  interest,  using  them  as  two  different  ways  of  describ- 
ing one  form  of  income,  rather  than  as  two  distinct  kinds  of  in- 
come. This  usage  is  based  on  the  obvious  fact  that  the  rent 
which  a  landlord  receives  for  an  acre  of  land  may  easily  be  com- 
puted as  a  certain  rate  of  interest  on  the  money  value  of  the  land, 
just  as  the  amount  earned  by  a  machine  may  be  viewed  either 

348 


THE   RENT   OF   LAND  349 

as  the  rent  of  the  machine  or  as  interest  on  its  money  value. 
But  we  shall  see  later  that  the  income  from  other  production 
goods,  while  governed  in  part  by  the  same  laws  that  control  the 
income  from  land,  is  also  governed  in  part  by  very  different  laws. 
Without  dwelling  further  upon  this  distinction  at  this  stage  of 
our  discussion,  let  us  remember  that  in  the  great  majority  of  eco- 
nomic writings  the  term  "  rent  "  means  only  an  income  from  land, 
and  that  it  is  used  only  in  this  sense  in  the  following  discussion. 
The  Services  of  Land.  —  The  first  thing  to  be  noted  about 
land  is  its  quality.  Differences  of  fertility  are  familiar  to  every  one, 
and  depend  upon  what  has  been  known  as  the  "original  and 
indestructible  properties  of  the  soil."  An  effort  has  been  made 
by  certain  writers  to  minimize  or  deny  the  significance  of  this 
factor.  It  has  been  said  that  "  soil "  is  not  indestructible,  that 
it  may  be  exhausted  or  removed  from  land  altogether,  and  that 
it  may  in  turn  be  created  by  means  of  fertilization.  These  writers 
recognize  in  land  no  other  indestructible  property  than  standing 
room.  This  objection  arises  from  the  use  of  the  word  "  soil  "  in  a 
narrow  sense.  If  by  "  soil "  we  mean  only  that  thin  top  layer 
containing  some  elements  necessary  to  plant  life,  it  is  true  that 
this  may  be  carted  on  or  off  at  pleasure,  that  it  may  be  wasted 
or  replenished.  But,  granting  this,  there  still  remain  many 
qualities  of  land  which  are  indestructible  and  unproducible, 
and  which  so  directly  affect  the  productiveness  of  the  land  that 
we  may  not  inappropriately  call  them  "properties  of  the  soil." 
Such  a  property  is  the  conformation  of  the  land.  A  steep,  grav- 
elly hillside  will  by  no  possible  effort  equal  a  plain  in  fertility. 
The  north  side  of  a  mountain  cannot  be  made  to  produce  the 
same  as  the  south  side.  Climate  is  not,  to  be  sure,  a  "property 
of  the  soil,"  but  it  is  an  inseparable  appurtenance  of  the  land, 
and  upon  it  the  productiveness  of  the  land  primarily  depends. 
It  is  needless  to  say  that  the  ownership  of  a  piece  of  land  carries 
with  it  the  advantage  of  all  the  conditions  which  attach  to  that 
land.  It  is  simply  true,  therefore,  that  the  expression  "original 
and  indestructible  properties  of  the  soil"  is  an  inadequate  and 
misleading  expression;  not  that  there  is  nothing  but  standing 
room  to  be  considered  under  such  a  term. 


35° 


OUTLINES   OF   ECONOMICS 


We  will,  therefore,  adopt  another  expression  to  explain  what 
we  mean  by  quality  in  land;  namely,  the  irremovable  conditions 
affecting  its  productiveness.  Of  these  its  extent  (standing  room), 
its  conformation,  and  its  climate  are  essentially  original  and  in- 
destructible. Others,  such  as  are  connected  with  the  "  soil "  in 
the  narrow  sense,  are  not  indestructible  nor  necessarily  original, 
but  they  affect  rent  none  the  less.  In  denning  quality  as  the 
conditions  affecting  productiveness  of  land,  we  have  discarded 
the  word  "soil"  because  it  has  proved  itself  treacherous;  we 
have  omitted  the  words  "original  and  indestructible"  because 
fertility  may  be  artificial,  and  is  always  destructible.  On  the 
other  hand,  fertility,  even  when  artificial,  becomes  essentially  a 
property  of  the  land.  While  it  is  physically  removable,  it  is  not 
economically  so.  From  the  case  where  capital  is  embodied  in 
land  and  entirely  assimilated  to  it  in  character,  we  pass  by  in- 
sensible gradations  to  fences,  barns,  houses,  etc.,  which  more 
and  more  assume  the  character  of  capital  as  distinguished  from 
land.  It  would  be  possible  to  restrict  the  term  "  land  "  to  strictly 
natural  land,  and  apply  the  term  "  capital "  to  all  products,  in- 
cluding the  soils  of  old  land.  This  would  be  a  logical  distinction, 
but,  like  so  many  logical  distinctions,  it  would  be  confusing.  On 
the  other  hand,  if  we  include  under  land  all  capital  that  has  been 
incorporated  in  it,  we  must  recognize  that  there  is  no  absolute 
line  of  division  between  land  and  capital.  Thus  we  are  again 
reminded  that  distinctions  in  economics,  as  well  as  in  practical 
life,  are  questions  of  convenience,  and  are  good  or  bad  according 
as  they  are  more  or  less  useful. 

The  second  great  fact  regarding  land  is  location.  On  one  side 
this  is  closely  connected  with  climate.  Land  situated  near  a 
body  of  water  or  near  a  mountain  range  is  much  affected  by 
these  great  controllers  of  climate.  But  a  more  distinct  meaning 
of  the  word  is  location  with  regard  to  the  consumers  of  products. 
Everybody  knows  that  land  a  hundred  miles  from  market  is, 
other  things  being  equal,  worth  more  than  land  a  thousand  miles 
from  market.  This,  however,  is  a  question  of  accessibility  rather 
than  of  mere  distance.  Land  may  be  far  away  and  yet  easy  to 
reach,  or  near  and  difficult  of  access.  It  will  be  noted  that  any 


THE   RENT   OF   LAND 


35' 


change  in  the  cost  of  transportation  affects  rents.  The  rents  of 
England  have  been  revolutionized  by  cheap  ocean  transporta- 
tion, which  has  practically  brought  distant  land  very  near  to  her 
shores.  To  this  fact  of  location  we  must  ascribe  almost  wholly 
the  enormous  rents  paid  for  city  lots.  Here,  again,  transporta- 
tion facilities,  such  as  are  afforded  by  good  rapid  transit  systems, 
powerfully  affect  rents. 

One  important  difference  in  the  way  quality  and  location  affect 
rent  must,  however,  be  noted.  The  quality  of  a  piece  of  land 
affects  the  amount  of  its  physical  product;  it  determines  how 
many  bushels  of  wheat  or  how  many  pounds  of  cotton  it  will 
yield  with  a  given  amount  of  cultivation.  The  location  of  land 
does  not,  it  is  true,  affect  the  amount  of  its  physical  product, 
but  it  does  affect  the  price  of  the  product,  since  that  varies  with 
the  expense  of  transporting  the  product  to  market.  The  value 
of  a  piece  of  land  to  the  user  depends  upon  the  value  of  its  yield, 
which  is  ascertained  by  multiplying  the  number  of  units  of  prod- 
uct by  the  price  per  unit.  Suppose  a  man  owns  two  wheat  farms 
of  equal  size,  one  in  Dakota  and  one  in  Illinois.  If  the  farm  in 
Dakota  produces  thirty  bushels  of  wheat  to  the  acre,  and  it  costs 
twenty  cents  a  bushel  to  get  it  to  the  Chicago  market,  where  wheat 
is  selling  at  a  dollar  per  bushel,  while  the  farmer  in  Illinois  pro- 
duces twenty-five  bushels  to  the  acre,  and  it  costs  four  cents  a 
bushel  to  get  this  to  the  Chicago  market,  the  farms  are  equally 
productive  so  far  as  the  owner  is  concerned,  for  in  each  case  he 
will  get  $24  for  an  acre's  yield  of  wheat.  If  the  other  conditions 
of  production  are  the  same,  the  farms  are  equally  valuable  to  the 
owner.  Prom  the  social  point  of  view,  too,  one  of  the  farms  is 
as  good  as  the  other.  For  the  costs  of  transportation,  of  moving 
things  to  where  they  are  wanted,  have  to  be  counted  among  the 
legitimate  and  necessary  costs  of  production.  In  short,  we  may 
say  that  the  two  pieces  of  land  are  equally  good  land.  When  we 
speak  of  good  land,  therefore,  in  connection  with  the  subject  of 
rent,  we  mean  land  which  for  all  purposes  taken  together  is  de- 
sirable. 

Rent  under  Assumed  Conditions  of  Uniform  Intensivity  of 
Cultivation.  — The  first  settlers  in  a  new  countrv  have  no  need  to 


352 


OUTLINES    OF   ECONOMICS 


pay  rent.  They  find  plenty  of  land,  and  even  the  best  of  it  will  be 
a  free  good,  like  air  or  water.  So  long  as  any  man  can  get  land 
of  the  best  quality  free,  there  is  no  reason  why  he  should  pay  rent 
to  any  one  else.  But  this  fortunate  state  of  affairs  will  last  only 
so  long  as  some  of  the  best  lands  remain  unoccupied.  When 
increase  in  the  population  makes  the  utilization  of  inferior  lands 
necessary,  the  owners  of  the  better  lands  will  be  able  to  demand 
and  receive  a  rent  for  the  use  of  their  lands.  This  will  be  made 
clear  by  reference  to  Figure  i,  which  is  constructed  on  the  assump- 


C  D 

FIG.  i 


F 


tion  that  there  are  six  grades  of  land,  A,  B,  C,  D,  E,  and  F,  and 
that  for  all  these  lands  the  same  amount  of  cultivation  per  acre 
is  necessary.  The  successive  rectangles  represent  the  selling 
value  of  the  product  that  can  be  raised  on  one  acre  of  each  of 
these  different  grades  of  land,  by  the  use  of  a  fixed  amount  of 
labor  and  capital.  The  product  of  an  acre  of  the  best  land,  A, 
will  sell  for  Oamy  dollars.  Until  all  of  this  best  land  is  occupied, 
no  rent  will  be  paid,  and  the  entire  value  of  the  product  will  be 
available  for  the  expense  of  the  capital  and  the  wages  of  labor 
employed  in  its  cultivation.1 

As  soon,  however,  as  it  becomes  necessary  to  cultivate  some  of 
the  B  lands,  the  situation  will  be  altered.  The  owners  of  the  A 
lands  can  now  exact  a  rent  for  their  use,  and  the  farmer  has  no 

1  The  profits  which  the  farmer  may  receive  as  entrepreneur  do  not  affect  th? 
analysis,  and  may  accordingly  be  neglected. 


THE   RENT   OF   LAND  353 

alternative,  except  to  utilize  land  of  the  second  grade,  on  which 
the  fixed  amount  of  labor  and  capital  will  only  produce  a  prod- 
uct per  acre  selling  for  abnk  dollars.  The  rent  which  will  be 
charged  per  acre  for  A  lands  will  amount  to  the  difference  between 
the  value  of  the  products  of  the  two  grades  of  land  (hkmy  in  the 
diagram).  For  if  the  landowners  attempt  to  charge  more  than 
this  difference,  the  farmers  will  find  it  more  advantageous  to  use 
the  B  lands;  if  they  charge  less,  the  A  lands  will  be  the  more 
remunerative  to  the  farmer,  and  competition  among  the  farmers 
for  the  leases  of  A  lands  will  force  the  rent  up.  In  short,  rent 
will  normally  be  fixed  at  the  point  which  will  just  equalize  the 
advantages  of  cultivating  the  two  kinds  of  land. 

As  soon  as  increased  population  and  the  consequent  need  of 
a  larger  food  supply  and  more  raw  materials  have  forced  men  to 
begin  to  cultivate  lands  of  the  C  grade,  the  B  lands  will  command  a 
rent,  while  the  rent  of  the  A  lands  will  be  increased  by  an  amount 
equal  to  the  rent  of  the  B  lands.  And  as  cultivation  is  pushed 
down  to  still  poorer  and  poorer  lands,  the  rents  which  these  better 
lands  command  will  be  still  further  increased.  Thus,  when  some 
lands  of  grade  E  are  in  use,  the  value  of  the  product  which  can 
be  got  from  this  free  land,  by  the  use  of  the  fixed  amount  of  labor 
and  capital,  will  be  dert  dollars  per  acre.  This  sum  will  just  pay 
the  cost  of  labor  and  capital,  for  if  it  amounts  to  less  than  these 
expenses  of  production,  the  E  lands  will  not  be  worth  cultivating; 
if  it  amounts  to  very  much  more,  it  will  pay  to  cultivate  still  poorer 
land.  But  if  dert  dollars  will  just  pay  wages  and  interest  on  the 
E  lands,  the  same  amount  will  pay  wages  and  interest  on  the 
better  lands,  for  we  have  assumed  that  the  same  amount  of  labor 
and  capital  is  used  on  each  grade  of  land.  The  expense  for  labor 
and  capital  will,  therefore,  be  represented  on  each  rectangle  by 
the  area  below  the  line  gt,  while  the  area  above  this  line  will  rep- 
resent in  each  case  the  rent  per  acre  which  the  landowner  will 
receive. 

Rent,  under  these  conditions,  is  a  differential  which  measures 
accurately  the  superiority  of  the  rent-bearing  land  over  the  mar- 
ginal land  —  the  land  which  just  repays  the  expenses  of  cultiva- 
tion. It  is  not  necessary  to  the  significance  of  the  theory  that 


354 


OUTLINES   OF   ECONOMICS 


all,  or  even  any,  of  the  farmers  should  be  tenant  farmers.  If 
the  farmer  owns  the  land  that  he  operates,  the  part  of  his  income 
which  measures  the  superiority  of  his  land  over  an  equal  area  of 
marginal  land,  must,  in  any  accurate  analysis,  be  counted  as  rent. 
Rent  under  Actual  Conditions.  — The  conditions  assumed  in 
the  foregoing  analysis  depart  from  actual  conditions  in  one  im- 
portant particular,  —  the  assumption  that  equal  amounts  of  labor 
and  capital,  that  is,  a  uniform  intensivity  of  cultivation,  would 
be  applied  to  lands  of  different  grades.  As  a  matter  of  fact,  even 
after  the  A  lands  are  all  occupied,  the  supply  of  agricultural  prod- 
ucts can  be  increased  without  resort  to  poorer  lands.  All  that  is 
really  necessary  is  the  more  intensive  cultivation  of  the  A  lands. 
This  cannot  be  done,  however,  without  encountering  the  law  of 
diminishing  productivity.  Successive  equal  amounts  of  labor 
and  capital  used  on  the  same  lands  cannot  be  expected  to  vield 
uniformly  large  increments  of  product.  It  will  pay,  however, 
to  make  use  of  more  intensive  cultivation  up  to  the  point  where 
the  last  unit  of  labor  and  capital  adds  barely  enough  to  the  prod- 
uct to  pay  for  the  increased  expense,  —  a  point  which  is  called 
the  intensive  margin.  The  result  of  this  more  intensive  culti- 
vation is  represented  in  Figure  2. 
Now  the  first  rectangle  in  this  dia- 
gram (Oamy)  represents  precisely 
the  same  thing  as  is  represented  by 
the  first  rectangle  in  Figure  i,  the 
return  (in  value  of  product)  from 
the  cultivation  of  an  acre  of  land 
P  of  A  grade  by  the  use  of  a  fixed 
amount  of  labor  and  capital.  The 
second  rectangle  in  Figure  2,  how- 
ever, represents  the  additional 
product  resulting  from  the  use  of  a 
similar  unit  of  labor  and  capital  on 
the  same  acre,  while  the  third  rep- 
resents the  increment  of  product  due  to  the  employment  of  yet  a 
third  unit  of  labor  and  capital  on  the  same  land.  Assume  that 
this  third  unit,  A^  adds  just  enough  to  the  selling  value  of  the 


At 


FIG.  2 


THE   RENT   OF  LAND 


355 


product  to  pay  for  itself.  Then,  as  already  explained  in  the 
discussion  of  diminishing  productivity,  the  area  Ocph  will  represent 
that  part  of  the  farmer's  income  which  will  be  used  up  by  the 
expense  incurred  for  the  three  units  of  labor  and  capital  used  on 
this  one  acre  of  land,  and  the  area  above  the  line  hq  will  repre- 
sent the  real  rent  of  that  acre.  If  land  E  (Figure  i)  just  repays 
the  expenses  of  cultivation  when  one  unit  of  labor  and  capital 
is  used  per  acre,  the  value  of  the  product  per  acre  of  this  land 
will  equal  the  value  of  the  increment  of  product  attributable  to 
the  third  unit  of  labor  and  capital  used  on  land  A.  (That  is,  the 
area  dcrt,  Figure  i,  equals  the  area  bcpq,  Figure  2.)  So  far, 
then,  as  the  margin  of  cultivation  is  concerned,  Figure  i  repre- 
sents the  conditions  accurately.  The  productivity  of  capital  and 
labor  at  the  intensive  and  extensive  margins  are  the  same.  But 
Figure  i  does  not  represent  the  complete  theory  of  rent  in  that 
(i)  it  does  not  indicate  the  fact  that  larger  quantities  of  capital 
and  labor  are  used  on  the  better  lands  than  on  the  poorer  lands, 
and  (2)  it  does  not  represent  the  larger  products  due  to  this 
more  intensive  cultivation  of  the  better  lands.  These  considera- 
tions are  taken  account  of 
in  Figure  3,  which  also,  by 
the  substitution  of  curves 
for  successive  rectangles, 
represents  the  infinite  vari- 
ety of  degrees  of  goodness 
of  the  different  acres  mak- 
ing up  the  land  supply  of 
a  country.  In  Figure  3 
the  line  am  represents  the 
value  of  a  product  of  a  unit 
of  labor  and  capital  on  the 
poorest  land  in  use,  and  the 
area  hmi  represents  what  FIG.  3 

rent  would  be  under  con- 
ditions of  uniform  intensivity  of  cultivation.     The  area  Oamg 
represents  the  diminishing  amounts  of  labor  and  capital  used 
per  acre  as  we  pass  from  the  better  to  the  poorer  lands,  while  the 


356  OUTLINES   OF  ECONOMICS 

area  ymg  represents  the  rent  per  acre  of  the  different  grades  of 
lands.  The  foregoing  analysis  leads  to  the  following  statement 
of  the  theory  of  rent,  which  the  reader  may  verify  for  himself  by 
referring  to  Figures  i  and  2 :  — 

The  rent  of  any  piece  of  land  is  measured  by  the  difference  between 
the  value  of  the  products  obtained  from  it  by  the  use  of  the  most  profit- 
able amounts  of  labor  and  capital  and  the  value  of  the  products 
which  could  be  obtained  by  the  use  of  the  same  amounts  of  labor  and 
capital  on  marginal  land,  or  at  the  intensive  margin  of  cultivation. 

This  statement  should  not  be  understood  as  comparing  the 
total  product  raised  on  a  given  piece  of  land  with  the  total  product 
which  could  be  got  from  the  same  amount  of  marginal  land. 
This  would  be  to  reintroduce  the  assumption  of  uniform  inten- 
sivity  of  cultivation  —  an  assumption  which  impaired  the  ade- 
quacy of  the  theory  of  rent  illustrated  in  Figure  i  above.  On  the 
contrary,  it  is  assumed  in  the  present  statement  that  the  farmer 
would  use  whatever  amount  of  the  marginal  land  he  found  most 
profitable.  If  it  were  profitable  to  use  twenty  times  as  much 
labor  and  capital  on  a  certain  piece  of  land  as  on  a  similar  amount 
of  marginal  land,  to  employ  the  same  amount  of  labor  and  capi- 
tal profitably  on  marginal  land  would  take  twenty  times  as  much 
land. 

Rent  and  the  Marginal  Product  of  Land.  —  In  an  earlier  chapter  it  was 
suggested  that  rent  could  be  measured  by  the  marginal  product  of  land ;  in 
other  words,  that  the  amount  which  a  farmer  would  pay  per  acre  for  the  use 
of  land  would  depend  upon  the  value  of  so  much  of  his  product  as  was  depend- 
ent upon  the  possession  of  any  one  acre  of  land.  In  that  discussion  it  was 
assumed,  however,  that  land  was  of  a  uniform  degree  of  goodness.  Obviously, 
if  all  land  really  were  of  a  uniform  degree  of  goodness,  in  all  ways  equally 
desirable,  no  rent  would  be  paid  until  all  lands  were  utilized,  when  rent  would 
arise  on  account  of  the  necessity  of  increased  intensivity  of  cultivation. 

But  even  under  the  actual  conditions  of  the  existence  of  different  grades  of 
land  and  of  a  large  body  of  land  which  is  below  the  margin  of  cultivation, 
the  rent  of  any  acre  of  the  better  lands  can  be  stated  in  terms  of  the  value 
of  its  product.  For  the  rent  of  any  acre  of  land  is  measured  by  the  value  of 
the  amount  of  the  product  imputed  to  it  (as  distinct  from  the  product  imputed 
to  the  labor  and  the  capital  employed  upon  it).  Now  the  product  that  must 
be  imputed  to  any  acre  of  land  is,  of  course,  the  amount  which  it  adds  to  the 
total  product,  or,  what  amounts  to  the  same  thing,  the  amount  by  which  the 


THE   RENT   OF  LAND  357 

total  product  would  be  decreased  if  just  as  much  labor  and  capital  were  em- 
ployed in  agriculture,  but  if  this  particular  acre  of  land  were  not  available. 
This  means,  however,  that  the  labor  and  capital  which  would  have  been 
employed  on  this  land  would  have  to  be  utilized  either  in  cultivating  the  lands 
already  utilized  more  intensively  or  in  cultivating  lands  previously  unculti- 
vated; that  is,  at  either  the  intensive  or  extensive  margin.  Obviously 
the  product  imputed  to  the  land  in  question  would  be  the  difference  between 
the  total  product  got  from  it  and  the  product  'which  would  result  from  the 
employment  of  the  same  amount  of  labor  and  capital  at  the  margin.  Thus,  by 
a  somewhat  different  line  of  analysis,  we  have  again  reached  the  statement 
of  the  theory  of  rent  given  in  the  preceding  section. 

The  Different  Uses  of  Land. — We  have  seen  that' the  better 
lands  will  repay  a  more  intensive  cultivation  than  the  poorer 
lands,  and  have  found  this  fact  to  be  of  great  significance  in  the 
theory  of  rent.  By  varying  degrees  of  intensivity  of  cultivation 
we  do  not  mean  only  the  more  thorough  cultivation  of  the  land 
in  the  raising  of  any  one  crop.  Land  produces  a  great  variety 
of  products,  and  some  of  these  need  much  more  intensive  culti- 
vation than  others.  In  the  business  of  raising  cattle,  as  it  is  con- 
ducted on  a  large  Western  ranch,  the  total  investment  of  capi- 
tal and  labor  may  be  very  considerable,  but  the  investment  per 
acre  of  land  is  very  small  indeed,  while  a  small  market  garden, 
located  near  a  great  city,  will  repay  a  very  high  degree  of  inten- 
sivity of  cultivation.  It  is  only  on  the  best  lands  that  crops  neces- 
sitating a  large  amount  of  labor  per  acre  can  be  raised  profitably. 
By  the  best  lands  we  mean  in  this  connection  not  only  those  lands 
which  are  best  fitted  by  soil  and  climate  for  the  production  of 
particular  crops,  but  the  best  lands  in  the  sense  that  they  are 
nearest  the  market.  For  example,  cities  in  the  eastern  part  of 
the  United  States  get  part  of  their  supply  of  fresh  vegetables 
from  market  gardens  in  their  own  environs,  while  another  part 
of  this  supply  may  come  from  the  Southern  states  and  even  across 
the  continent  from  California.  The  local  market  gardens  are 
good  lands  on  account  of  their  situation;  the  more  distant  lands 
are  good  lands  on  account  of  special  qualities  of  soil  or  climate 
which  enable  them  to  furnish  "out  of  season"  vegetables. 

Because  certain  lands  are  adapted,  on  account  of  quality  or 
location,  for  intensive  cultivation,  they  command  high  rents. 


358  OUTLINES   OF  ECONOMICS 

On  the  other  hand,  lands  which  command  high  rents  generally 
have  to  be  cultivated  intensively,  because  the  entrepreneur  is 
forced  by  the  very  fact  of  high  rent  to  economize  in  his  use  of 
land  as  compared  with  his  use  of  capital  and  labor.  The  raising 
of  flax  as  raw  material  for  linen  is  a  profitable  agricultural  indus- 
try in  densely  populated  Belgium,  but  it  has  never  met  with  much 
success  in  the  United  States  because  flax  straw  of  a  quality  fit  for 
the  better  grades  of  linen  demands  a  large  amount  of  care  and 
labor.  Land  is  so  plentiful  here  that  it  pays  us  better  to  special- 
ize in  a  less  intensive  kind  of  agriculture  —  to  spread  our  labor 
and  capital  more  thinly  over  a  larger  number  of  acres. 

The  poorest  land  that  can  be  profitably  used  in  the  growing 
of  any  one  kind  of  product  is  not  necessarily  marginal  land. 
Land  too  poor  to  use  for  market  gardening  may  be  good  wheat 
land;  land  too  poor  to  devote  to  wheat  may  be  good  grazing  land. 
The  poorest  land  devoted  to  any  one  purpose  may  yield  a  rent, 
arising  from  its  relative  superiority  for  some  other  use.  It  will 
be  readily  understood  that  the  marginal  lands  used  as  a  basis  of 
comparison  in  our  statement  of  the  law  of  rent  are  the  poorest 
lands  used  for  any  purpose  —  grazing  lands,  possibly.  But,  as 
we  have  seen,  rent  may  also  be  measured  from  the  intensive  mar- 
gin of  cultivation,  and  the  intensive  margin  is  found  on  all 
lands,  even  the  best. 

Although  all  our  illustrations  of  the  theory  of  rent  have  been 
drawn  from  agriculture,  the  theory  is,  in  fact,  perfectly  general. 
The  rent  of  land  used  for  industrial  or  commercial  purposes  is 
determined  in  precisely  the  same  way  as  the  rent  of  agricultural 
land.  In  fact,  different  kinds  of  manufacturing,  wholesale  and 
retail  trading,  quarrying,  forestry,  etc.,  may  be  looked  upon  as 
different  possible  uses  of  land,  differing  in  the  amount  of  labor 
and  capital  they  require,  and  all  subject  to  the  law  of  diminish- 
ing productivity,  and  hence  to  the  law  of  rent.  When  we  pass 
from  the  agricultural  uses  of  land  to  its  commercial  and  indus- 
trial uses,  the  fact  of  quality  becomes  of  practically  no  importance 
in  the  determination  of  rent,  while  the  fact  of  location  becomes 
the  fundamental  one. 

In  addition  to  these  different  productive  uses  of  land,  we  have 


THE   RENT   OF   LAND 


359 


to  take  account  of  its  other  uses,  such  as  for  pleasure  grounds  and 
residence  sites.  Here  the  explanation  of  rent  is  simpler  than  in 
the  case  of  productive  lands.  For  these  lands  yield  their  utilities 
directly,  and  hence  come  under  the  general  law  of  value.  Such 
lands  command  a  rent  on  account  of  their  capacity  to  satisfy 
human  wants  directly,  the  extent  of  this  capacity  being  measured 
by  their  marginal  utility.  In  the  case  of  productive  lands,  it  is 
only  their  products  that  satisfy  human  wants  directly.  The 
lands  themselves  are  valued  according  to  the  specific  share  of  the 
valuable  product  that  can  be  imputed  to  their  productivity,  as 
distinct  from  the  productivity  of  labor  and  capital. 

The  Capitalization  of  Rent.  — To  the  individual  who  has  a  cer- 
tain amount  of  money  for  which  he  is  seeking  the  most  profitable 
use,  the  question  whether  he  shall  invest  it  in  land  or  other  form 
of  production  goods  is  apt  to  be  in  itself  an  unimportant  one.  If 
he  chooses  to  buy  land,  it  will  be  because  he  can  get  a  satisfactory 
income  from  it,  and  he  will  very  properly  count  the  income  as 
interest  on  the  money  he  has  invested  in  the  land.  If  the  income 
from  the  land  increases,  the  selling  value  of  the  land  will  increase. 
From  the  point  of  view  of  our  investor  this  will,  of  course,  be  an 
increase  in  the  "capital  value"  of  the  land.  It  is  important  to 
note,  however,  that  the  land  does  not  return  an  income  simply 
because  it  is  valuable.  The  process  is  the  reverse  of  this.  The 
land  aids  annually  in  the  production  of  goods  which  command  a 
price  in  the  market;  a  part  of  the  value  of  this  annual  product  is 
imputed  to  the  service  of  land  and  paid  for  in  the  form  of  eco- 
nomic rent;  and  the  land  is  valued  because  it  commands  a  rent. 
The  value  of  the  land  is  governed  by  its  income-yielding  power. 

This  fundamental  fact  is  apt  to  escape  our  notice  because  in  the 
United  States  lands  are  more  commonly  sold  than  rented,  so  that 
we  think  of  the  value  of  lands  as  the  prices  at  which  they  will  sell, 
rather  than  their  annual  value,  or  rent,  although  the  first  kind  of 
value  is  derived  from  the  second.  In  England,  where  lands  are 
more  commonly  rented,  the  value  of  land  is  usually  thought  of  as 
its  annual  value  or  rent,  while  the  selling  value  is  often  expressed 
as  "twenty  (or  other  number  of)  years'  purchase,"  meaning  twenty 
times  the  annual  rent.  The  process  by  which  the  capacity  to  yield 


360  OUTLINES   OF  ECONOMICS 

a  certain  annual  income  is  made  the  basis  for  the  determination 
of  a  certain  selling  price  is  termed  "capitalization."  l  In  a  coun- 
try which  is  growing  in  population  and  wealth,  and  where  land 
rents  are  consequently  increasing,  the  selling  value  of  land  is  apt 
to  be  somewhat  greater  than  a  capitalization  of  the  amount  of 
income  it  is  yielding  at  the  time  of  the  sale  would  justify.  This 
is  because  the  ownership  of  land  carries  with  it  the  right  to  receive 
future  as  well  as  present  incomes,  and  the  prospectively  larger 
future  incomes  are  taken  into  account  in  the  process  of  capitali- 
zation. 

Rent  and  Social  Progress.  — The  fact  just  mentioned  —  the 
tendency  of  rents  to  increase  as  society  progresses  —  is  of  very 
great  significance.  It  springs  from  the  impossibility  of  satisfy- 
ing the  increasing  wants  of  a  society  which  is  growing  in  popu- 
lation and  wealth  without  increasing  the  supply  of  food  products 
and  raw  materials  by  means  of  more  extensive  and  more  intensive 
cultivation.  As  this  means  pushing  downward  the  extensive  and 
intensive  margins  of  cultivation,  the  necessary  result  is  a  rise  in 
rents. 

During  the  early  years  of  the  nineteenth  century  the  Napole- 
onic wars  on  the  continent,  together  with  a  high  protective  tariff 
in  England,  kept  England  from  importing  any  grain  from  Europe. 
This,  coupled  with  a  considerable  increase  in  the  population  of 
England,  resulted  in  very  high  prices  for  wheat,  a  rapid  extension 
of  cultivation,  and  a  remarkable  rise  in  rents.  It  was  the  effort 
on  the  part  of  economic  writers  to  explain  these  facts  that  led  to 
the  formulation  of  the  theory  of  rent  in  substantially  its  present 
form.  Bound  up  with  this  theory  of  rent  was  the  law  of  dimin- 
ishing returns  —  the  name  usually  given  to  the  statement  that 
the  supply  of  agricultural  products  cannot  be  increased  except 
by  the  utilization  of  poorer  and  poorer  lands,  and  consequently 
at  an  increasing  expense  per  unit  of  product.  (This  law  should 

1  The  nature  of  this  process  of  capitalization  will  be  discussed  in  the  chapter 
on  Interest.  It  is  a  fact  of  common  observation  that  the  rate  of  capitalization, 
that  is,  the  ratio  of  income  to  selling  value,  is  lower  in  the  case  of  land  than  in  the 
case  of  most  forms  of  capital  goods.  The  durability  of  land,  the  variety  of  uses 
to  which  it  may  be  put,  and  the  social  prestige  attached  to  land  ownership  are 
among  the  things  that  account  for  this. 


THE   RENT   O¥   LAND  361 

not  be  confused  with  the  law  of  diminishing  productivity.  One 
is  a  statement  of  a  historical  tendency  in  one  form  of  produc- 
tion —  agriculture;  the  other  relates  to  the  proportions  in  which 
the  factors  of  production  are  combined,  and  holds  true  for  all 
forms  of  production.) 

This  law  of  diminishing  returns  has  been  made  the  basis  of 
many  gloomy  prophecies  regarding  the  possibilities  of  a  general 
and  continued  economic  progress.  Especially  when  this  theory 
was  combined  with  the  Malthusian  theory  of  population,  which 
was  based  on  the  belief  that  population  would  tend  to  increase 
as  fast  as  the  food  supply  would  permit,  did  it  seem  to  point  to 
insuperable  barriers  in  the  way  of  any  considerable  progress  in 
human  welfare. 

The  history  of  the  past  century  has  belied  these  gloomy  prophe- 
cies. The  increase  in  population  has  been  greater  than  in  any 
previous  period  of  the  world's  history,  and  yet,  so  far  as  agricul- 
tural lands  are  concerned,  the  general  level  of  rents  has  not  in- 
creased. In  fact,  the  change  has  been  in  the  other  direction. 
That  rents  have  not  increased  as  population  has  grown,  does  not 
disprove  the  law  of  diminishing  returns.  That  law,  like  other 
economic  laws,  is  true  only  as  a  statement  of  a  tendency.  If 
this  tendency  has  not  resulted  in  increased  rents,  it  is  not  because 
it  has  not  been  operative,  but  because  other  powerful  factors 
have  counteracted  its  effects.  Two  things,  at  least,  have  pre- 
vented a  rise  in  rents.  In  the  first  place,  improvements  in  agri- 
cultural methods  have  greatly  increased  the  product  which  can 
be  got  from  a  given  acre  of  land.  We  must  include  here  not  only 
improvements  in  methods  of  tillage  and  cultivation,  in  fertilizers, 
in  the  varieties  of  plants,  in  breeds  of  live  stock,  etc.,  but  also 
organized  social  methods  looking  toward  a  better  utilization  of 
the  nation's  land  supply,  such  as  the  irrigation  of  dry  lands,  and 
scientific  forestry,  which  latter  has  an  important  influence  upon 
the  conservation  of  the  rainfall. 

Of  much  greater  importance,  however,  than  all  these  things 
taken  together,  has  been  the  revolution  in  ocean  and  land  trans- 
portation, which  has  so  largely  increased  the  available  amount 
of  land.  Lands  in  England  have  gone  out  of  cultivation  because 


362  OUTLINES'  OF  ECONOMICS 

the  railway  and  the  steamship  have  brought  the  great  wheat  fields 
of  America  to  her  very  doors.  Even  in  the  United  States  the  new 
lands  brought  near  to  market  by  the  railways  have  often  been  of 
better  quality  than  the  lands  previously  cultivated,  so  that  the 
margin  of  cultivation  has  gone  up  rather  than  down.  There  were 
2,250,000  acres  of  improved  farming  lands  in  the  state  of  New 
Hampshire  in  1850;  by  1900  this  acreage  had  shrunk  to  1,075,000. 
In  Massachusetts  the  improved  farm  lands  decreased  in  this  period 
of  fifty  years  from  2,135,000  acres  to  1,300,000  acres.  Similar 
figures  could  be  given  for  others  of  the  older  states.  The  dimi- 
nution in  the  use  of  old  lands  may  be  partly  accounted  for  by 
their  deterioration  in  fertility  under  continual  cultivation  without 
proper  rotation  of  crops.  But  this  is  only  a  partial  explanation, 
for  any  one  who  is  familiar  with  the  conditions  knows  that  even 
the  most  careful  tillage  could  not  have  kept  millions  of  acres  of 
farm  land  which  were  once  rent-yielding  from  going  below  the 
margin  of  cultivation,  for  the  simple  reason  that  the  margin  of 
cultivation  rose.  The  railway  practice  of  making  very  much  lower 
rates  per  mile  on  long  hauls  than  on  short  hauls  has  hastened  this 
process,  by  minimizing  the  disadvantages  of  lands  of  good  qual- 
ity situated  at  a  distance  from  the  market. 

The  fact  that  since  the  introduction  of  the  railway  the  margin 
of  cultivation  has  risen  does  not  mean  that  it  has  risen  continu- 
ously, or  that  it  will  continue  to  rise.  There  are  many  who  be- 
lieve that  we  have  only  gained  a  brief  and  already  passing  respite 
from  the  day  when  every  increase  in  the  demand  for  food  products 
and  raw  materials  will  be  met  only  with  increasing  difficulty. 
It  is  as  dangerous  to  prophesy,  however,  as  it  was  a  hundred  years 
ago.  The  fact  that  there  still  remain  some  unutilized  lands  of 
good  quality  in  what  are  now  out-of-the-way  parts  of  the  world 
may  prove  to  be  of  less  importance  than  other  things.  It  is  a 
striking  fact  that  in  the  United  States  to-day  only  about  half  of 
the  land  actually  in  farms  is  cultivated.  Some  of  these  unculti- 
vated portions  of  farms  are  very  poor  lands,  and  others  are  given 
over  to  meadows  and  pastures.  But  we  venture  to  say  that  this 
idle  acreage  is  due  in  part  to  a  lack  of  correspondence  between 
the  historical  conditions  that  have  fixed  the  size  of  farms  and  the 


THE   RENT   OF   LAND  363 

economic  conditions  that  fix  the  number  of  acres  that  can  be 
profitably  utilized  by  one  farmer.  This  unexploited  area  is,  to 
that  extent  at  least,  a  reserve  which  can  be  drawn  upon  as  the 
demand  for  agricultural  products  increases.  Then,  too,  we  are 
just  beginning  to  have  some  idea  of  the  improvements  which 
scientific  selection  may  bring  about  in  the  qualities  and  produc- 
tiveness of  different  kinds  of  plants;  methods  of  fertilization  and 
tillage  are  still  the  subjects  of  fruitful  scientific  inquiry;  forestry 
and  irrigation  are  yet  in  their  infancy.  Changes  in  demand,  of 
such  a  nature  as  to  make  possible  the  utilization  of  some  lands  for 
the  production  of  crops  for  which  they  are  better  fitted  than  for 
their  present  uses,  are  also  among  the  things  that  may  resist  the 
tendency  toward  a  general  rise  in  rents.  In  fact,  although  it  is 
absurd  to  suppose  that  the  rent  of  land  will  not  increase  as  society 
continues  to  increase  in  wealth  and  numbers,  it  is  just  as  absurd 
to  make  this  fundamental  tendency  toward  diminishing  returns 
in  agriculture  a  basis  for  pessimistic  views  regarding  the  possi- 
bility of  economic  progress. 

The  Unearned  Increment. — When  we  say  that  the  margin  of 
cultivation  has  gone  up,  rather  than  down,  since  1850,  we  do  not 
imply  that  rents  have  not,  in  many  cases,  increased.  The  new 
lands  opened  up  to  use  by  new  railways,  for  example,  are  at  first 
very  cheap  lands,  often  free  lands.  As  they  are  taken  up,  they 
command  higher  and  higher  rents.  Practically  all  of  the  agri- 
cultural lands  now  utilized  in  America  have  had  such  a  history, 
—  even  though  in  some  cases  the  present  rents  are  not  as  high 
as  their  rents  at  some  previous  time.  The  fact  that,  through  the 
change  in  transportation  methods,  the  marginal  farming  lands 
of  to-day  are  better  lands  than  the  marginal  farming  lands  of  sixty 
years  ago  does  not  affect  the  fact  that  the  sum  total  of  land  rents, 
and  consequently  of  land  values,  is  immensely  greater  to-day  than 
at  any  previous  time.  The  increase  in  the  value  of  land  which 
accompanies  the  increase  in  its  income-yielding  power  is  often 
called  the  unearned  increment.  This  phrase  suggests  that  the  in- 
crease in  land  values  cannot  be  attributed  to  any  special  effort 
on  the  part  of  the  owners  of  land,  but  is  due  to  general  social 
causes. 


364  OUTLINES   OF  ECONOMICS 

This  does  not  mean  that  the  land-owning  farmer  cannot  increase 
the  selling  value  of  his  farm  by  wise  investments  of  capital;  but, 
remembering  that  rent  is  the  payment  for  the  irremovable  con- 
ditions affecting  the  productiveness  of  land,  it  is  clear  that  it  can 
be  affected  only  to  a  comparatively  small  degree  by  the  efforts 
of  individual  landowners.  Most  of  the  present  values  of  lands 
have  grown  out  of  that  complex  of  things  which  we  call  general 
social  progress,  the  most  important  of  which  in  this  connection 
are  growth  in  population  and  growth  in  average  wealth  —  the 
things  that  lead  to  an  increased  demand  for  the  products  of  the 
soil.  Nor  is  the  truth  of  this  statement  affected  by  the  fact  that 
the  opening  of  new  lands  has  been  among  the  most  powerful  fac- 
tors that  have  made  possible  this  growth  in  population  and  wealth. 
A  very  large  part  of  the  increase  in  land  values  would  have  come 
about,  even  if  the  use  of  land  and  the  ownership  of  land  were 
entirely  distinct,  if  all  lands  were  leased,  rather  than  owned,  by  the 
users  of  land.  We  should,  however,  be  careful  to  distinguish  the 
rise  in  the  sum  total  of  rents  which  springs  from  the  occupation 
of  new  and  often  better  lands,  and  the  increase  in  rent  per  acre, 
which  comes  from  forcing  downward  the  margin  of  cultivation. 

Some  writers  have  suggested  that  landowners  do  not  secure 
an  unearned  increment,  because  future  as  well  as  present  earning 
power  is  taken  account  of  in  fixing  the  price  at  which  land  is 
bought.  But  whether  the  selling  value  of  land  is  based  on  its 
present  or  future  earning  capacity,  this  selling  value  will  increase 
so  long  as  the  earning  capacity  of  the  land  increases,  and  so  long 
as  the  increase  in  earning  capacity  promises  to  continue  into  the 
future.  An  unearned  increment  is  attached  to  valuable  land, 
whether  it  is  still  in  the  hands  of  the  original  owner,  who  may 
have  got  it  for  nothing,  or  whether  its  ownership  has  been  trans- 
ferred a  hundred  times.  Most  economists  have  seen  in  the  un- 
earned increment  a  fact  of  very  great  social  significance,  and  some 
have  even  supported  various  plans  by  which  some  of  the  unearned 
value  might  be  returned  to  society  through  special  taxation. 

An  American  reformer,  Henry  George,  converted  a  large  following  to  his 
view  that  all  taxes  should  be  levied  upon  land  values.  This  scheme,  known 
as  the  "single  tax,"  proposes  that  economic  rent  shall  go  to  the  government 


THE   RENT   OF   LAND  365 

in  lieu  of  taxes  —  a  proceeding  which  would  amount  to  the  government 
ownership  of  land,  and  is  so  understood  by  its  adherents.  The  merits  and 
defects  of  the  single  tax  as  a  scheme  for  raising  public  revenue  will  be  con- 
sidered in  another  place.  Here  we  are  concerned  with  it  simply  as  a  scheme 
of  economic  reform.  Henry  George's  main  argument  was  based  on  the  alleged 
tendency  of  land  to  absorb  all  the  value  due  to  "improvements  in  the  pro- 
ductive power  of  labor."  Among  these  improvements  in  the  productive 
power  of  labor  he  included  such  diverse  things  as  "  the  growth  of  population, 
the  increase  and  extension  of  exchanges,  the  discoveries  of  science,  the  march 
of  invention,  the  spread  of  education,  the  improvement  of  government,"  etc. 
"Land  being  necessary  to  labor,  and  being  reduced  to  private  ownership, 
every  increase  in  the  productive  power  of  labor  but  increases  rent  —  the 
price  that  labor  must  pay  for  the  opportunity  to  utilize  its  powers,  and  thus 
all  the  advantages  gained  by  the  march  of  progress  go  to  the  owner  of  land, 
and  wages  do  not  increase." 

In  the  first  place,  we  may  object  strongly  to  the  assumption  that  improve- 
ments in  methods  of  production  necessarily  mean  improvements  in  the  "  pro- 
ductive power  of  labor" — an  assumption  which,  like  the  socialists'  labor 
theory  of  value,  really  begs  the  whole  question.  It  would  be  just  as  reason- 
able to  call  these  things  improvements  in  the  productive  power  of  capital 
or  improvements  in  the  productive  power  of  land.  In  the  second  place,  we 
must  enter  an  emphatic  denial  to  the  statement  that  "all  the  advantages 
gained  by  the  march  of  progress  go  to  the  owner  of  land."  If  the  supply  of 
labor  is  increasing  more  rapidly  than  the  supply  of  land,  it  is  probable  that 
rent  per  acre  will  increase  faster  than  wages  per  laborer;  but  this  does  not 
preclude  an  advance  in  wages. 

It  must  be  remembered,  too,  that  Henry  George  did  not  propose  to  abolish 
rent,  —  an  obvious  impossibility,  —  but  simply  to  do  away  with  the  private 
receipt  of  rent.  This  would  prevent  the  withholding  of  land  from  use  for 
purely  speculative  purposes;  thus  increase  the  available  supply  of  land, 
and  consequently  lower  rents.  That  such  would  be  the  immediate  result  of 
throwing  all  land  open  to  use  cannot  be  denied.  But  in  the  long  run  it  would 
probably  have  little  effect  on  rent,  as  it  would  simply  lead  to  a  more  rapid 
exploitation  of  the  land.  Land  ownership,  like  any  other  institution,  has 
to  be  judged  from  the  broad  viewpoint  of  social  interests.  The  "pride  of 
ownership,"  as  an  incentive  to  accumulation  and  as  a  basis  for  good  citizen- 
ship, cannot  be  lightly  put  aside. 

Urban  Lands.  —  The  unearned  increment  is  an  especially  sig- 
nificant phenomenon  in  the  case  of  urban  lands.  In  the  modern 
city  we  have  a  tremendous  mass  of  land  values  created  by  causes 
that  are  purely  social,  being  an  absolutely  necessary  result  of 
the  concentration  of  a  large  population  on  a  relatively  small 


366  OUTLINES   OF  ECONOMICS 

area.1  All  are  familiar  with  the  narrow  limits  set  upon  the  whole- 
sale districts,  the  shopping  districts,  and  the  financial  districts 
in  American  cities.  The  residence  districts  to  which  the  greatest 
social  prestige  attaches  are  apt  to  be  quite  as  narrowly  restricted. 
Improvements  in  rapid  transit  facilities  enlarge  the  residence 
areas  that  are  utilized  by  people  with  moderate  incomes,  but  only 
serve  to  increase  the  congestion  in  the  business  centers.  There 
is  much  to  be  said  in  favor  of  the  special  taxation  of  city  land 
values.  Movements  in  this  direction  have  already  gained  great 
strength  in  England  and  Germany.  Taxes  so  heavy  as  to  amount 
to  confiscation  would,  in  the  opinion  of  the  present  writers,  be 
unjustifiable,  and,  in  the  United  States,  unconstitutional. 

QUESTIONS  AND  EXERCISES 

1.  Malthus  and  Ricardo  differed  as  to  whether  rent  is  an  addition  to  the 
total  income  of  society.     What  is  the  correct  view  ? 

2.  An  accepted  doctrine  of  taxation  is  that  landowners  cannot  shift  a  tax 
on  land  values  to  any  one  else  (as  the  tax  on  tobacco  is  shifted  from  the 
manufacturer  to  the  consumer).     Explain  this  on  the  basis  of  the  theory 
of  rent. 

3.  "Rent  does  not  enter  into  the  determination  of  price."     Explain  the 
meaning  of  this  statement,  understanding  price  to  mean  "normal  value." 

REFERENCES 

CARVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  V. 

GEORGE,  HENRY.     Progress  and  Poverty. 

KURD,  R.  M.     The  Principles  of  City  Land  Values. 

MARSHALL,  ALFRED.    Principles  of  Economics,  Vol.  I,  4th  ed.,  Book  VI, 

Chaps.  IX  and  X. 

PIERSON,  N.  G.     Principles  oj  Economics,  Vol.  I,  Part.  I,  Chap.  II. 
RICARDO,  DAVID.     Principles  of  Political  Economy  and  Taxation,  Chap.  II. 
TAYLOR,  H.  C.     Agricultural  Economics,  Chap.  IX. 
WALKER,  F.  A.     Land  and  its  Rent. 

1  The  assessed  value  of  land,  exclusive  of  improvements,  in  the  city  of  New  York, 
amounted  in  1907  to  over  three  and  a  half  billions  of  dollars  —  an  amount  nearly 
twice  as  great  as  the  assessed  value  of  all  the  real  estate,  including  improvements, 
in  the  state  of  New  York  outside  of  the  city. 


CHAPTER    XXII 
THE   WAGES  OF   LABOR 

WAGES  constitute  the  price  paid  for  the  services  of  labor.  Under 
the  head  of  "  labor  "  we  include  all  the  various  kinds  of  personal 
services  for  which  a  payment  is  made.  Professional  men  and 
salaried  employees  are  wage  earners  in  the  economic  sense,  though 
the  term  is  by  common  usage  generally  restricted  to  manual 
laborers  working  for  daily  or  weekly  payments.  There  is  how- 
ever, in  society  to-day,  as  every  one  recognizes,  a  "  laboring  class," 
marked  off  by  lines  that  are  fairly  distinct,  and  including  the  great 
body  of  day  laborers,  factory  hands,  agricultural  laborers,  men  in 
various  trades  requiring  various  degrees  of  intelligence  and  skill, 
employees  in  minor  positions  in  business  and  mercantile  establish- 
ments, and  the  like.  Some  of  the  most  important  and  pressing 
present-day  economic  problems  —  the  variety  of  things  that  make 
up  what  is  often  called  the  "  labor  problem  "  —  relate  to  the  eco- 
nomic position  of  this  class.  On  this  account  it  becomes  of  special 
importance  to  ascertain  just  what  the  rules  are  that  determine 
its  share  in  the  national  dividend.  In  the  discussion  of  wages, 
then,  we  have  in  mind  primarily  the  income  of  the  "  laboring 
class,"  although  some  of  the  principles  that  will  be  developed 
apply  just  as  accurately  to  the  other  incomes  that  must  be 
classed  as  wages  in  the  economic  sense. 

Wages  as  the  Price  of  Labor.  — The  definition  of  wages  already 
given  suggests  at  once  the  most  important  fact  about  them:  they 
are  the  prices  paid  for  particular  kinds  of  services,  and  hence  come 
under  the  general  laws  of  supply  and  demand.  So  far  as  the  wages 
of  any  one  kind  of  labor  are  concerned,  we  can  say,  as  we  did  of 
the  prices  of  commodities,  that  they  will  tend  to  be  fixed  at  the 
point  where  the  supply  of  that  kind  of  labor  and  the  demand  for 

367 


368  OUTLINES   OF  ECONOMICS 

it  are  in  equilibrium.  But,  as  was  found  in  the  discussion  of  the 
prices  of  commodities,  this  simple  statement  does  not  take  us  very 
far  into  the  analysis  of  the  problem.  We  want  to  know  why  the 
supply  of  labor  and  the  demand  for  it  are  what  they  are.  We  shall 
find,  too,  that  the  factors  governing  the  supply  and  demand  of 
labor  are  in  some  respects  very  different  from  those  governing  the 
supply  and  demand  of  commodities. 

The  Demand  for  Labor. — The  demand  for  labor  is,  in  the  last 
analysis,  a  demand  for  the  products  of  labor.  Labor  does  not 
command  a  price  on  its  own  account,  but  because  it  aids  in  the 
production  of  things  that  satisfy  human  wants.  But  how  can  we 
measure  the  product  of  labor?  How  can  we  distinguish  it  from 
the  shares  in  the  total  product  that  are  to  be  attributed  to  land  and 
capital  ?  We  obviously  cannot  say  that  the  product  of  labor  is 
to  be  measured  by  the  difference  between  the  total  product  pro- 
duced by  the  cooperation  of  labor,  land,  and  capital  and  the  prod- 
uct which  would  be  produced  by  land,  and  capital  working  alone; 
for  this  last  would,  of  course,  be  zero.  The  fact  is,  as  we  have  seen 
in  a  previous  chapter,  that  the  proportion  of  the  product  that  is 
attributed  to  labor  is  determined  by  the  principle  of  marginal 
productivity.  That  is,  we  cannot  think  of  the  "  product  of  labor," 
except  as  the  product  of  the  individual  laborers  making  up  the 
supply  of  labor,  and  the  product  of  any  individual  laborer  is  ac- 
tually and  exactly  the  amount  which  he  adds  to  the  total  product 
of  land,  labor,  and  capital;  in  other  words,  the  amount  by  which 
the  total  product  would  be  decreased  if  the  labor  of  this  individual 
laborer  were  not  utilized.  The  social  demand  for  the  products 
of  labor,  which  is  the  basis  of  the  entrepreneur's  demand  for  labor, 
is  not  a  demand  for  any  vague  abstraction  like  the  "  product  of 
labor  in  general,"  but  is  a  demand  for  the  concrete  products  due 
to  the  activities  of  individual  laborers. 

We  must  note  also  that  in  the  case  of  labor,  as  in  the  case  of 
commodities,  the  word  "  demand  "  must  not  be  taken  in  a  loose, 
indefinite  sense.  The  demand  for  commodities  means  the  quan- 
tities that  will  be  taken  at  certain  definite  prices.  The  demand 
for  labor  does  not  mean  anything  unless  it  is  understood  to  refer 
to  the  number  of  laborers  that  will  be  employed  in  a  particular 


THE   WAGES    OF   LABOR  369 

occupation  at  a  certain  wage.  In  a  given  occupation  at  a  particu- 
lar time  wages  might  be  fixed  at  any  one  of  a  large  number  of  dif- 
ferent possible  points.  The  higher  the  wage,  the  smaller  will  be 
the  number  of  laborers  that  an  entrepreneur  can  afford  to  employ; 
and  that  for  two  reasons:  In  the  first  place,  the  higher  wages 
mean  higher  expenses  of  production,  and  consequently  higher 
prices  will  have  to  be  charged  for  the  product  —  a  fact  which  will 
reduce  the  quantity  of  the  product  that  can  be  sold  on  the  market, 
and  consequently  reduce  the  demand  for  labor.  In  the  second 
place,  higher  wages  for  labor  will  induce  entrepreneurs  to  econo- 
mize in  the  use  of  labor,  and  to  use  relatively  more  land  and 
capital,  according  to  the  principles  which  have  been  explained 
in  the  discussion  of  diminishing  productivity.  The  demand  for 
any  particular  kind  of  labor  is  thus  a  complex  factor,  influenced 
both  by  variations  in  the  demand  for  the  products  of  that  particular 
kind  of  labor,  and  in  the  proportions  of  the  product  that  can  be 
attributed  to  labor  rather  than  to  land  and  capital. 

In  a  similar  way  the  elasticity  of  the  demand  for  any  kind  of 
labor  —  the  extent  to  which  variations  in  wages  will  affect  the 
quantity  of  labor  utilized  —  is  a  complex  function,  being  affected 
not  only  by  the  elasticity  of  the  demand  for  the  particular  products 
produced  by  this  kind  of  labor,  but  also  by  the  readiness  with 
which  more  capital  or  more  land,  or  both,  can  be  substituted  for 
labor,  as,  labor  becomes  higher  priced.  In  the  printing  industry, 
for  example,  a  rise  in  wages  would  make  it  profitable  for  employing 
printers  to  use  more  labor-saving  machinery,  such  as  type-setting 
and  linotype  machines,  automatic  press  feeders,  and  the  like. 
The  higher  the  wages  of  agricultural  laborers,  the  more  profitable 
will  be  the  more  extensive,  as  compared  with  the  more  intensive, 
uses  of  land.  On  the  other  hand,  the  reader  will  at  once  think 
of  many  trades,  such  as  plumbing,  where  machinery  cannot  be 
substituted  for  hand  labor,  and  where,  consequently,  the  only 
elastic  element  in  the  demand  for  labor  lies  in  the  elasticity  of  the 
demand  for  the  products  of  labor. 

The  Effect  of  Labor-saving  Machinery  on  the  Demand  for  Labor.  —  In  what 
has  just  been  said  about  the  use  of  machinery  as  a  substitute  for  labor,  we 
have  had  in  mind  only  the  effect  of  changes  of  wages  on  the  relative  amounts 
2B 


370  OUTLINES   OF  ECONOMICS 

of  labor  and  of  capital  that  would  be  used  in  any  one  branch  of  production. 
Quite  another  problem,  and  one  of  great  social  importance,  relates  to  the  way 
in  which  the  demand  for  labor  is  affected  by  new  inventions  and  by  the 
introduction  of  new  machine  processes.  The  laborers  themselves  have  often 
looked  at  such  innovations  with  hostility.  When  machinery  first  began  to 
be  used  extensively  in  the  woolen  industry  in  England,  this  opposition  was 
expressed  in  riots  in  which  the  new  machines  were  destroyed,  as  well  as  in 
"  proposals  to  impose  legislative  restrictions  on  the  use  of  machines,  so  as  to 
bring  them  to  a  level  with  hand  work,  and  prevent  them  from  doing  the  work 
more  quickly  or  more  cheaply  than  it  could  be  done  by  hand."  l  In  many 
cases  laborers  still  are  inclined  to  view  the  introduction  of  labor-saving 
machinery  as  an  economic  injury  to  themselves.  On  the  other  hand,  there 
are  many  persons  who  claim  that  this  attitude  on  the  part  of  the  laborers  is 
an  evidence  of  shortsightedness,  since  the  inevitable  result  of  machine  pro- 
duction is  to  cheapen  the  prices  of  products  and  thus  to  lower  the  cost  of 
living,  the  net  result  being  an  increase  in  real  wages,  as  contrasted  with  nominal 
or  money  wages. 

This  view  emphasizes  an  important  truth,  and  yet  it  misses  the  real  point 
of  the  laborers'  alleged  grievance.  It  is  true  that  while  the  first  result  of  the 
introduction  of  improved  methods  of  production  is  often  to  bring  larger  profits 
to  those  who  introduce  them  (especially  if  the  new  methods  are  protected  by 
patents),  their  benefits  are  ultimately  diffused  throughout  society  at  large  in 
the  form  of  the  fuller  and  better  satisfaction  of  wants,  and  the  laboring  class, 
as  members  of  society,  share  in  these  advantages.  But  while  it  is  thus  true 
that  such  improvements  ultimately  redound  to  the  benefit  of  laborers  as  a 
class,  it  is  equally  true  that  hardship  to  many  individual  laborers  is  often  an 
immediate  result  of  the  introduction  of  labor-saving  machinery.  Especially 
is  this  true  in  the  case  of  skilled  workmen  in  highly  specialized  employments, 
who  sometimes  find  themselves  suddenly  deprived  of  the  advantages  of  their 
skill,  —  gained  often  by  long  years  of  apprenticeship.  To  expect  that  such 
men  will  feel  that  they  are  compensated  for  their  personal  loss  by  the  advan- 
tages ultimately  accruing  to  laborers  as  a  class,  is  to  ask  too  much  of  the  altru- 
istic elements  in  human  nature.  Workmen  have  learned,  however,  from  the 
experience  of  the  past  hundred  years,  that  the  introduction  of  machinery  is 
inevitable,  and  in  the  better-organized  trades  they  are  in  many  cases  pursuing 
the  wiser  course  of  trying  to  regulate  the  conditions  of  the  introduction  of  new 
kinds  of  labor-saving  machinery  in  such  a  way  as  to  diminish  the  hardship  in- 
flicted on  individual  workingmen.  Thus,  when  the  linotype  machine  began  to 
displace  hand  compositors  in  the  printing  trade,  the  typographical  union  was 
able  to  secure  the  retention  of  many  hand  compositors  as  linotype  operators, 
together  with  a  reduction  in  the  length  of  the  working  day. 

It  should  be  noted  also  that  the  effect  of  the  introduction  of  machinery 
upon  the  demand  for  labor  varies  in  different  industries,  the  most  important 

1  Cunningham  and  McArthur,  English  Industrial  History,  p.  226. 


THE   WAGES   OF   LABOR  371 

factor  in  this  connection  being  the  elasticity  of  the  demand  for  the  products 
of  the  particular  trade  affected.  In  the  case  of  the  linotype  just  mentioned, 
the  lessened  cost  of  composition  made  it  possible  for  newspapers  to  increase 
their  reading  matter  greatly,  so  that  the  actual  reduction  in  the  number  of 
employees  was  small  compared  with  what  might  have  been  expected.  The 
introduction  of  machine  methods  into  the  English  texile  industry  during  the 
period  of  the  Industrial  Revolution  furnishes  an  instructive  example.  The 
change  in  the  methods  of  manufacturing  cotton  cloth  came  just  as  the  in- 
vention of  the  cotton  gin  had  greatly  increased  and  cheapened  the  supply  of 
raw  material.  This,  coupled  with  the  decreased  cost  of  manufacturing,  so 
cheapened  cotton  cloth  (which  had  previously  been  very  expensive)  that  its 
use  was  largely  increased.  In  fact,  a  great  many  more  persons  were  employed 
in  spinning  and  weaving  cotton  soon  after  the  Industrial  Revolution  than 
immediately  before  it.  In  the  woolen  industry,  however,  there  was  no  such 
immediate  increase  in  the  sale  of  the  product,  so  that  many  workers  were 
displaced,  and  had  to  seek  occupations  where  their  specialized  skill  was  of  no 
avail.  Especially  when  the  occupation  affected  is  a  highly  specialized  but 
relatively  unimportant  one  in  a  series  of  processes  comprised  in  the  manufac- 
ture of  a  product  the  wage-earning  power  of  the  displaced  laborers  is  apt  to 
be  seriously  diminished. 

The  Supply  of  Labor.  —  It  is  when  we  fix  our  attention  upon  the 
nature  of  the  supply  of  labor  that  differences  between  the  way 
in  which  wages  are  determined  and  the  way  in  which  the  prices 
of  commodities  are  determined  become  most  noticeable.  In  the 
first  place,  if  we  view  industry  in  general,  we  notice  that  in  the  case 
of  labor  there  cannot  be  much  difference  between  the  actual  supply 
and  what  we  called,  when  discussing  exchange  value,  the  "  po- 
tential supply."  Labor  is  in  this  particular  like  the  most  perish- 
able of  commodities:  the  number  of  working  days  in  a  man's 
life  is  limited,  and  those  that  are  not  sold  are  irrevocably  gone. 
The  laborer  has,  it  is  true,  some  power  in  the  way  of  "  holding 
out  for  higher  wages,"  but  even  this  power  is  limited  rather  nar- 
rowly by  the  absolute  necessity  of  making  a  livelihood.  In  the 
long  run  small  wages  are  better  than  none.  The  sale  of  labor  is 
most  often  a  forced  sale.  In  the  second  place,  the  fact  that  labor 
is  inseparable  from  the  person  of  the  laborer  has  important  results. 
When  the  laborer  enters  into  an  agreement  to  work  for  wages,  he 
not  only  sells  his  labor,  but  he  gives  up  a  certain  amount  of  control 
over  his  own  life ;  he  agrees  to  live  and  work  under  conditions  — 
often  unpleasant  ones  —  set  for  him  by  others  ;  he  accepts,  in 


372  OUTLINES   OF  ECONOMICS 

short,  all  the  environment  of  his  task,  as  well  as  the  task  itself. 
Connected  to  some  extent  with  this  last  fact  is  a  third  difference 
—  the  relative  immobility  of  labor.  Commodities  may  always 
be  sent  to  the  market  where  they  will  command  the  best  price, 
but  the  laborer  is  restrained  by  family  ties,  patriotism,  differences 
in  language,  customs,  and  religion,  ignorance,  and  the  like.  The 
result  is  that  variations  in  wages  as  between  different  countries 
or  as  between  different  localities  in  the  same  country  are  much 
greater  than  similar  variations  in  prices. 

We  are  apt  to  take  it  for  granted  that  the  supply  of  labor  in  dif- 
ferent countries  and  localities  depends  primarily  on  the  numbers 
of  the  population.  This  is,  of  course,  fundamentally  true,  but  we 
must  also  note  that  the  structure  of  the  population  is  a  variable 
thing,  and  one  that  affects  the  supply  of  labor.  Over  four  fifths 
of  the  persons  employed  in  gainful  occupations  in  the  United  States 
in  1900  were  males  —  a  fact  which  suggests  that  the  relative 
proportions  of  the  sexes  in  the  population  have  an  important  effect 
on  the  supply  of  labor.  There  are  more  males  than  females  in 
the  population  of  the  United  States,  while  the  reverse  is  true  of 
most  European  countries,  this  difference  being  due  in  large  part 
to  the  excess  of  males  among  our  European  immigrants.  There 
are  important  differences  in  this  respect  between  the  individual 
states.  Males  constitute  nearly  two  thirds  of  the  population  of 
Montana  and  less  than  one  half  of  the  population  of  Massachusetts. 
The  age  composition  of  the  population  must  also  be  taken  into 
account.  The  United  States  census  of  1900  showed  that  nine 
tenths  of  the  persons  engaged  in  gainful  occupations  were  between 
15  and  65  years  of  age  —  comprising  what  is  sometimes  called 
the  "  productive  age  group."  A  larger  proportion  of  the  popu- 
lation of  the  United  States  is  between  these  ages  than  is  the  case 
in  most  European  countries  —  a  fact  which  is  due  to  the  large 
number  of  foreign-born  adults  in  our  population.  In  most  Euro- 
pean countries  a  larger  proportion  of  the  population  is  of  "  pro- 
ductive age  "  than  is  true  for  the  native  population  of  the  United 
States.  In  considering  the  effect  of  these  natural  groupings  of 
the  population  upon  the  supply  of  labor,  we  have  to  also  take  ac- 
count of  differences  in  the  nature  of  industries,  in  national  or  local 


THE   WAGES    OF   LABOR 


373 


customs,  and  in  the  presence  or  absence  of  legal  restrictions,  — 
all  of  which  affect  the  number  of  women  and  children  who  can 
be  counted  as  part  of  the  available  supply  of  labor.  Many  ob- 
servers have  suggested  that  the  frequent  holidays  found  in  the 
Latin  countries  of  Europe  form  an  appreciable  obstacle  in  the 
way  of  the  industrial  development  of  those  countries,  as  they 
materially  diminish  the  real  supply  of  labor. 

The  supply  of  labor  is  not,  however,  merely  a  matter  of  the 
number  of  available  laborers;  it  is  also  conditioned  by  their  effi- 
ciency. The  physical  strength  and  vigor,  industry,  intelligence, 
ingenuity,  and  moral  qualities  of  the  laboring  population  deter- 
mine the  amount  and  kinds  of  work  they  can  do.  These  things 
vary  greatly  as  between  different  races  and  as  between  different 
individuals  of  the  same  race.  They  are  not  entirely  a  matter  of 
heredity,  for  they  can  be  influenced  greatly  by  the  physical  and 
social  environment.  So  far  as  high  wages  mean  more  and  better 
food,  and  improve  the  other  conditions  of  living,  they  tend  to  in- 
crease physical  and  mental  efficiency,  and  thus  to  increase  the 
quantity  and  better  the  quality  of  labor  that  can  be  got  from  a 
given  population.  There  may  often  be,  even  when  we  take  only 
production  into  account,  a  real  economy  in  high  wages.1  Public 
education  and  public  activity  in  regard  to  such  matters  as  pure 
foods,  hygienic  conditions  in  homes  and  in  factories,  and  oppor- 
tunities for  wholesome  recreation  tend  to  increase  the  efficiency  of 
labor,  and  might  be  justified  on  this  ground.  The  right  view, 
however,  is  that  such  things  would  be  justified  on  their  own  ac- 
count, as  tending  to  raise  the  level  of  human  living,  even  if  they 
did  not  increase  human  efficiency. 

The  Relation  of  the  Growth  of  the  Population  to  the  Supply  of 
Labor.  —  Just  as  the  potential  supply  of  commodities  at  any  given 
time  is  determined  largely  by  past  conditions,  so  the  potential 
supply  of  labor  at  any  given  time  is  to  a  very  large  extent  pre- 
determined. Subject  to  the  limitations  which  have  been  men- 

1  It  sometimes  happens  that  a  sudden  decrease  in  wages  acts  as  a  spur  or 
stimulus,  and  thus  increases,  temporarily,  the  productive  efficiency  of  labor. 
This  fact,  which  has  been  noted  by  many  employers,  does  not  affect  the  signifi- 
cance of  the  relation  between  high  wages  and  efficiency,  when  a  longer  period  of 
time  is  taken  into  account. 


374  OUTLINES   OF  ECONOMICS 

tioned  in  the  preceding  section,  the  supply  of  labor  is  a  matter  of 
the  numbers  of  the  population,  and  the  factors  affecting  the  growth 
of  the  population  are,  from  the  long-time  point  of  view,  the  most 
important  things  determining  the  supply  of  labor.  Most  of  the 
discussion  of  these  factors  has  centered  around  the  Malthusian 
theory  of  population  —  the  doctrine  that  population  tends  to 
increase  faster  than  the  food  supply,  and  is  only  held  back  by  the 
actual  pressure  of  famine  and  disease  (arising  from  an  insufficient 
food  supply) ,  or  by  the  prudential  motives  which  restrain  men  from 
undertaking  the  responsibility  of  marrying  and  raising  families 
upon  incomes  insufficient  to  provide  the  necessities  of  life.  Just 
what  the  first  part  of  this  doctrine  means  can  be  made  clear  by 
referring  to  the  conditions  in  a  country  like  India,  where  the  popu- 
lation presses  so  closely  upon  the  food  supply  that  any  considerable 
failure  in  the  rice  crop  is  sure  to  result  in  famine  and  starvation. 
Every  increase  in  the  food  supply  is  followed  there  by  an  increase 
in  the  birth  rate  and  a  decrease  in  the  death  rate;  every  diminu- 
tion in  the  food  supply  is  followed  by  a  decrease  in  the  birth  rate 
and  an  increase  in  the  death  rate.  The  frequent  famines  in  India, 
which  have  been  charged  by  some  ignorant  or  prejudiced  observers 
to  neglect  or  incompetence  on  the  part  of  the  British  government, 
are,  in  fact,  absolutely  unpreventable,  so  long  as  these  conditions 
prevail.  When,  however,  we  fix  our  attention  upon  the  United 
States,  or  England,  or  any  country  possessing  Western  civilization, 
we  notice  some  things  that  do  not  seem  to  harmonize  with  the 
Malthusian  theory.  The  population  does  not  press  so  closely 
upon  the  food  supply  that  any  widespread  suffering  follows  a 
season  of  poor  crops.  Poverty  seems  to  have  but  little  restrictive 
effect  on  the  birth  rate,  which  is  generally  higher  among  the  poorer 
classes  than  among  the  well-to-do.  Such  facts  have  been  cited 
by  critics  of  the  Malthusian  theory,  some  of  whom  have  been 
inclined  to  credit  it  with  very  little  economic  significance.  Yet 
when  we  take  a  broader  view  of  the  facts,  they  appear  in  quite  a 
different  light. 

The  best  estimates  indicate  that  England  did  not  have  over 
five  and  a  half  million  inhabitants  in  1630,  and  yet  overcrowding 
at  home  was  one  of  the  reasons  commonly  given  for  the  policy 


THE   WAGES   OF   LABOR 


375 


of  colonization  which  England  was  undertaking  at  that  time.  A 
hundred  years  later,  despite  the  growth  of  industry,  and  of  foreign 
and  domestic  trade,  as  well  as  some  important  improvements  in 
agricultural  methods,  the  population  had  increased  to  only  about 
6,200,000.  In  1761,  on  the  eve  of  the  Industrial  Revolution,  the 
population  is  estimated  to  have  been  about  6,7oo,ooo.1  By  1831, 
when  the  factory  system  was  thoroughly  established  (although 
England  was  still  trying  to  raise  most  of  her  own  food  supply), 
the  population  had  more  than  doubled,  amounting  to  about 
14,000,000.  Since  that  time  England  has  developed  her  manu- 
facturing and  commercial  interests,  but  has  imported  a  larger  and 
larger  proportion  of  her  food  supply  and  raw  materials  from  newer 
countries,  where  land  is  cheaper.  The  latest  census  of  England 
(1901)  showed  a  population  of  32,500,000.  There  is  no  explana- 
tion of  this  remarkable  growth  in  the  population  of  a  country 
which  was  "  overcrowded  "  in  1630,  other  than  the  obvious  one 
contained  in  the  fact  that  the  opening  up  of  new  countries  and  the 
improvements  in  transportation  have  enormously  increased  the 
world's  supply  of  food  products  and  raw  materials  —  a  consider- 
able portion  of  which  England  has  been  able  to  get  for  herself 
through  the  development  of  those  commercial  and  manufacturing 
activities  in  which  her  early  start,  her  situation,  her  coal  and  iron 
mines,  and  her  own  necessities,  have  given  her  a  preeminence. 

The  total  population  of  all  Europe  in  1760  was  probably  not 
over  130,000,000.  In  1905  it  was  about  405,000,000,  some 
200,000,000  of  this  increase  having  taken  place  since  1820,  and 
about  100,000,000  since  1872.  Account  must  also  be  taken  of 
about  100,000,000  persons  of  European  origin  or  descent  living 
outside  of  Europe  at  the  beginning  of  the  twentieth  century. 
Moreover,  wherever  this  European  expansion  has  carried  Western 
civilization  and  industrial  methods,  the  numbers  of  the  native 
population  have  more  often  increased  than  decreased.2  Such,  for 
example,  is  the  case  in  Mexico,  South  America,  the  Philippines, 
Java,  India,  and  Egypt.  For  at  least  a  hundred  and  fifty  years 

1  For  these  estimates,  see  Census  of  Great  Britain,  1850,  Vol.  II. 
*  W.  F.  Willcox,  "The  Expansion  of  Europe  in  its  Influence  upon  Population," 
in  Studies  in  Philosophy  and  Psychology,  by  former  students  of  C.  E.  Garman. 


376  OUTLINES    OF   ECONOMICS 

before  the  opening  of  Japan  to  Western  civilization  its  population 
had  remained  nearly  stationary.  Since  1871  it  has  increased  from 
33,000,000  to  approximately  50,000,000  (1908).  The  probability 
that  this  great  increase  in  that  part  of  the  world's  population  which 
has  adopted  modern  industrial  methods  has  come  about  by  a 
decrease  in  the  death  rate  rather  than  by  an  increase  in  the  birth 
rate  does  not  alter  the  significance  of  the  fact  that  these  improved 
methods  of  production  and  transportation  have  operated  like  the 
release  of  a  spring,1  allowing  the  natural  tendency  toward  the 
increase  of  the  population  to  work  itself  out  more  fully. 

In  view  of  these  facts  it  is  impossible  to  deny  a  large  amount  of 
significance  to  the  Malthusian  theory  of  population.  Population 
has  generally  increased  wherever  the  increase  in  wealth  has 
afforded  it  opportunity.  Yet  it  does  not  follow  that  the  Mal- 
thusian theory  is,  in  its  strictest  interpretation,  true.  Population 
has  not  increased  as  rapidly  as  wealth  has  increased.  Average 
real  incomes  are  very  much  higher  than  they  were  before  the  In- 
dustrial Revolution  —  a  statement  that  holds  true  for  average 
real  wages  as  a  particular  form  of  income.  Interpreted  in  the 
light  of  the  theory  of  diminishing  productivity,  this  means  that 
population  has  not  increased  so  rapidly  as  capital  and  the  avail- 
able supply  of  land  have  increased.  If  there  had  been  no  increase 
in  population  during  the  last  one  hundred  and  fifty  years,  the  mar- 
ginal productivity  of  labor  would  (if,  nevertheless,  modern  methods 
of  production  had  been  developed)  have  been  very  much  higher 
than  it  is,  and  wages  would  have  been  correspondingly  higher 
than  they  are. 

The  Subsistence  Theory  of  Wages.  —  The  doctrine  that  wages 
tend,  in  the  long  run,  to  equal  a  bare  subsistence,  was  a  theory 
advanced  by  English  economists  in  the  first  quarter  of  the  nine- 
teenth century  as  a  corollary  of  the  Malthusian  law  of  population. 
Said  Ricardo:  "The  natural  price  of  labor  is  that  price  which  is 
necessary  to  enable  the  laborers,  one  with  another,  to  subsist  and 
to  perpetuate  their  race,  without  either  increase  or  diminution." 
Granting  the  premises,  the  logic  was  incontrovertible:  If  wages 

1  This  figure  was  applied  to  the  effect  of  an  increase  in  wealth  upon  the  growth  of 
the  population  by  Sir  James  Steuart,  in  his  treatise  on  Political  Economy  (1767). 


THE   WAGES   OF   LABOR  377 

fall  below  this  level  of  subsistence,  the  result  will  be,  in  the  long  run, 
fewer  laborers  and  therefore  higher  wages.  If  the  increase  in 
wages  goes  beyond  the  level  fixed  by  the  cost  of  subsistence,  the 
result  will  be,  according  to  the  Malthusian  doctrine,  more  laborers 
and  therefore  lower  wages.  The  cost  of  subsistence  in  this  view 
formed  the  "  expenses  of  production  "  of  labor,  and  the  actual 
wages  determined  by  supply  and  demand  were  supposed  to  fluctu- 
ate around  these  normal  wages  as  the  market  values  of  commodi- 
ties fluctuate  around  the  normal  values  fixed  by  the  expenses 
of  production.  Socialists  and  advocates  of  the  single  tax  have 
made  much  of  this  theory  of  wages  as  proving  the  impossibility 
of  bettering  the  condition  of  the  laboring  class  under  existing 
conditions.  By  some  socialists  this  doctrine,  in  its  most  rigid 
form,  has  been  called  the  "  iron  law  of  wages."  But  socialists 
and  followers  of  Henry  George  alike  have  to  face  the  difficulty 
of  accepting  this  theory  and  at  the  same  time  rejecting  the  theory 
of  population  on  which  it  rests  —  a  theory  which  they  cannot 
accept,  for  its  truth  would  obviously  place  insuperable  obstacles 
in  the  way  of  any  lasting  improvement  in  wages  being  achieved 
through  the  adoption  of  their  schemes.  The  subsistence  theory 
of  wages,  if  true,  would  hold  just  as  true  under  socialism  or  under 
the  national  ownership  of  land  as  under  existing  conditions. 

It  should  be  said  that  the  subsistence  theory  of  wages  was  in 
part  a  reflex  of  the  conditions  actually  existing  in  England  at  the 
time.  Wages  were  very  low,  and  the  law  required  that  deficiencies 
in  wages,  below  the  amount  necessary  for  the  maintenance  of  the 
laborer  and  his  family,  should  be  made  up  out  of  parish  funds 
—  a  provision  which  in  itself  tended  to  keep  down  wages,  and  was 
made  still  worse  by  the  fact  that  the  allowance  for  maintenance 
to  each  family  was  proportioned  to  the  size  of  the  family,  thus 
encouraging  the  rapid  increase  of  the  population. 

The  Relation  of  the  Standard  of  Life  to  the  Supply  of  Labor.  — 
Whatever  may  have  been  the  case  in  the  past,  the  subsistence 
theory  of  wages  does  not  square  with  the  facts  of  to-day,  for  the 
amount  paid  in  wages  is  obviously  considerably  more  than  is 
"  necessary  to  enable  the  laborers  to  subsist  and  to  perpetuate 
their  race,  without  either  increase  or  diminution."  Ricardo  him- 


378  OUTLINES   OF   ECONOMICS 

self  did  not  give  to  the  "  minimum  of  subsistence  "  the  fixed  and 
rigid  meaning  which  some  socialists  have  attached  to  it.  It 
varied,  he  recognized,  with  the  habits  and  customs  of  the  people. 
In  this  more  elastic  form  the  "  minimum  of  subsistence  "  shades 
into  what  is  termed  more  accurately  the  "  standard  of  life."  The 
number  and  character  of  the  wants  which  a  man  considers  more 
important  than  marriage  and  family  constitute  his  standard  of  life. 
Whenever  wages  fall  below  a  point  where  the  standard  of  life  can 
be  maintained  for  a  family,  the  workman  will  do  without  the  family 
and  maintain  the  standard  of  life  for  himself  alone.  While  the 
increase  in  the  quantity  of  goods  produced  that  has  taken  place  by 
reason  of  the  industrial  revolution  and  the  utilization  of  new  and 
vast  bodies  of  natural  resources  has  been  attended  with  an  unprece- 
dented increase  in  population,  it  has  also  been  attended  with  an 
improvement  in  the  standard  of  living.  Every  advance  in  the 
standard  of  life  marks  a  step  definitely  gained  in  the  economic 
progress  of  the  laboring  class ;  it  affords  a  vantage  ground  for  yet 
farther  progress. 

This  is  not  only  because  the  standard  of  life  is,  by  very  definition, 
a  fundamental  factor  in  determining,  in  the  long  run,  the  supply 
of  labor,  but  also  because  experience  has  shown  that  the  standard 
of  life  affords  an  element  of  strength  to  laborers  in  their  bargains 
with  employers.  Any  encroachments  on  it  are  met  with  strong 
and  determined  resistance.  Moreover,  a  high  standard  of  life  is, 
as  we  have  seen,  one  of  the  things  that  make  for  productive  effi- 
ciency on  the  part  of  the  laborer,  and  hence  tend  to  increase  his 
earning  capacity.  Many  persons  who  are  deeply  interested  in 
the  welfare  of  the  laboring  class  believe  that  the  wisest  philanthropy 
is  embodied  in  the  efforts  that  are  made  to  raise  the  level  of  living. 
Among  such  efforts  are  included  such  things  as  the  work  of  social 
settlements,  public  and  private  movements  to  secure  better  con- 
ditions of  housing,  municipal  expenditures  for  places  of  public 
recreation,  for  public  libraries,  for  such  things  even  as  clean  and 
well-lighted  streets;  and,  above  all,  public  education. 

The  extent  to  which  the  possibility  of  attaining  a  still  higher  standard  of 
living  operates  as  a  restraining  force  upon  the  increase  of  the  population  is 
largely  determined  by  the  extent  to  which  democratic  ideals  are  realized 


THE   WAGES   OF   LABOR  379 

in  the  social  organization.  It  is  a  noticeable  fact,  for  example,  that  the  first 
generation  of  immigrants  to  the  United  States  bring  with  them  the  habits  and 
ways  of  living  of  their  European  homes.  So  long  as  simple  standards  of  life 
are  retained  in  connection  with  the  larger  incomes  which  they  are  able  to_ 
earn  in  this  country,  more  of  them  are  able  to  marry ;  they  are  able  to  marry 
earlier,  and  they  can  raise  larger  families.  But  the  second  generation  grows 
up  in  an  American  environment.  They  attend  our  public  schools,  where  they 
mingle  with  American  children  and  receive  an  American  education.  The 
possibility  of  taking  a  social  and  economic  position  higher  than  that  of  their 
parents  is  opened  up  to  them.  They  become  saturated  with  the  American  no- 
tion that  each  man  has  a  chance  to  climb  to  the  top  of  the  ladder.  They  find 
here  no  rigid  barriers  separating  social  classes  from  one  another.  "Like 
father,  like  son"  may  have  been  true  in  Europe ;  here  it  has  no  binding  force. 
Hence  the  birth  rate  among  our  native  population  of  foreign  parentage  is 
very  much  lower  than  the  birth  rate  among  our  foreign-born  population. 

The  Supply  of  Labor  in  Different  Occupations.  —  Just  as  the 
demand  for  labor  on  the  part  of  entrepreneurs  is  not  a  demand  for 
"  labor  in  general,"  but  a  demand  for  specific  kinds  of  labor, 
so  the  supply  of  labor  is  the  supply  of  laborers  who  are  able  and 
willing  to  do  certain  definite  kinds  of  work.  The  supply  of  labor 
in  any  given  occupation  is,  at  any  given  time,  almost  as  rigidly 
fixed  as  is  the  supply  of  labor  in  general.  Laborers  can  usually 
change  from  one  occupation  to  another  only  at  the  loss  of  the 
advantage  of  whatever  specialized  skill  they  may  have  acquired. 
This  is,  however,  a  matter  of  occupation,  not  of  industries.  There 
is,  for  example,  a  wide  range  of  industries  open  to  a  skilled  me- 
chanic or  a  stationary  engineer.  In  the  skilled  trades  what  varia- 
bility there  is  in  the  supply  (at  any  given  time)  comes  less  from 
any  possibility  of  passing  from  one  trade  to  another  than  from  the 
opportunities  the  more  efficient  and  ambitious  workmen  have  of 
entering  business  on  their  own  account  (that  is,  of  becoming  entre- 
preneurs) or  of  entering  some  calling  where  ability,  rather  than 
specialized  skill,  is  the  prime  requisite.  The  carpenter  may  be- 
come a  contractor;  the  skilled  mechanic  may  become  a  traveling 
salesman,  and  this,  very  likely,  in  some  line  where  his  specialized 
skill  will  still  be  of  some  advantage.  The  options  thus  open  to 
the  stronger  members  of  each  group  should  not  be  lost  sight  of 
in  any  consideration  of  the  forces  tending  to  resist  a  downward 
movement  in  the  wages  paid  in  any  occupation. 


380  OUTLINES   OF   ECONOMICS 

Throughout  the  greater  part  of  American  history  the  most  im- 
portant option  of  this  kind  has  been  due  to  the  existence  of  a  large 
body  of  free  land.  The  mobility  of  labor  in  this  country  has  been 
such  that  it  has  been  impossible  for  wages  to  fall  much  below 
the  amount  which  a  man  could  make  for  himself  by  taking  up 
government  land  on  the  frontier.  To-day,  however,  we  are  con- 
fronted by  a  different  set  of  conditions.  The  frontier  has  com- 
pleted its  journey  across  the  continent,  and  there  remains  for  the 
settler  only  such  land  as  irrigation  may  reclaim  from  the  arid 
regions  of  the  West.  The  wage  earner  will  henceforth  be  without 
the  strong  support  of  the  economic  alternative  of  a  living  got 
from  free  land. 

When  we  take  the  long-period  point  of  view,  we  find  more  elas- 
ticity in  the  supply  of  labor  in  particular  occupations.  The  ranks 
of  each  trade  are  being  continually  depleted  by  old  age,  death, 
and,  to  some  extent,  by  the  alternatives  open  to  its  stronger  mem- 
bers. These  gaps  need  not  be  filled  by  an  incoming  body  of  ap- 
prentices if  the  wages  paid  are  lower  than  the  wages  in  other 
occupations  demanding  a  similar  degree  of  preparation  and  ability. 
But  there  is  a  certain  amount  of  inelasticity  even  here,  for  a  variety 
of  reasons,  among  which  we  may  note:  the  habit  of  imitation, 
which  leads  a  boy  to  enter  the  same  occupation  his  acquaintances 
have  chosen;  the  not  infrequent  tendency  of  sons  to  enter  their 
father's  occupation;  lack  of  knowledge  or  of  early  appreciation 
of  the  relative  advantages  of  different  employments,  and  the  fact 
that  only  a  small  number  of  options  may  be  open  to  the  residents 
of  a  particular  territory.  These  facts,  in  turn,  have  an  important 
bearing  upon  the  localization  of  industry,  for  industries  are  apt 
to  be  located  in  places  where  there  is  a  present  and  prospective 
supply  of  specially  skilled  labor. 

Differences  in  wages,  together  with  other  factors  just  mentioned, 
are  not,  however,  the  only  considerations  which  attract  laborers 
to  different  occupations.  Many  economic  writers  have  observed 
that  there  are  differences  in  the  wages  paid  in  different  employ- 
ments which  are  out  of  all  proportion  to  any  differences  in  the 
training  or  the  ability  they  require.  Adam  Smith  enumerated 
five  circumstances  which  "  make  up  for  a  small  pecuniary  gain  in 


THE   WAGES    OF   LABOR  381 

some  employments,  and  counterbalance  a  great  one  in  others." 
These  are:  "I.  The  agreeableness  or  disagreeableness  of  the 
employments  themselves;  II.  The  easiness  and  cheapness,  or 
the  difficulty  and  expense,  of  learning  them;  III.  The  constancy 
or  inconstancy  of  employment  in  them;  IV.  The  small  or  great 
trust  which  must  be  reposed  in  those  who  exercise  them  ;  and  V. 
The  probability  or  improbability  of  success  in  them."  These  cir- 
cumstances need  explanation  in  two  particulars:  First,  the  agree- 
ableness or  disagreeableness  of  an  employment  is  very  often  a 
matter  of  the  social  standing  attached  to  it.  Many  men  are  doing 
clerical  work  to  whom  some  kind  of  physical  exertion  would  be 
both  more  pleasant  and  more  profitable,  but  who  dislike  to  be 
classed  among  the  "  manual  laborers."  So-called  "  professional 
pursuits  "  attract  many  men  to  whom  more  lucrative  opportunities, 
requiring  less  special  preparation,  are  open  in  other  employments. 
In  the  second  place,  the  significance  of  these  circumstances  is 
affected  by  the  fact  that  the  most  poorly  paid  (because  the  least 
efficient)  laborers  are  found  in  the  most  disagreeable  and  the  most 
uncertain  employments. 

The  Wage  Contract.  —  The  wages  that  a  laborer  actually 
receives  are  determined  by  an  agreement  between  himself  and  his 
employer.  Here  appear  again  those  "  gains  of  bargaining " 
which  were  mentioned  in  the  discussion  of  the  prices  of  commodi- 
ties. But  in  the  case  of  the  wage  agreement,  if  the  bargain  is 
between  an  employer  and  an  individual  workman,  the  advantage 
is  apt  to  be  all  on  one  side.  The  employer  is  apt  to  know  pretty 
accurately  what  he  can  afford  to  pay  the  laborer;  he  knows  about 
how  much  the  laborer  will  add  to  his  product,  and  his  knowledge 
of  business  conditions  helps  him  to  estimate  the  value  of  this  added 
product.  He  knows  what  it  would  cost  him  to  get  his  added  prod- 
uct in  other  ways,  as  by  paying  some  of  his  present  employees 
for  "  overtime  "  work,  or  possibly  by  speeding  his  machinery 
faster.  Moreover,  there  is  the  possibility,  or  even  probability,  of 
getting  some  other  laborer,  in  case  he  fails  to  come  to  an  agree- 
ment with  the  one  in  question.  His  experience  as  an  employer 
of  laborers  will  help  him  to  gage  the  minimum  that  the  laborer 
will  accept.  With  the  laborer  the  situation  is  very  different.  He 


382  OUTLINES   OF  ECONOMICS 

can  gage  with  less  accuracy  just  how  much  his  services  are  worth 
to  the  employer.  The  minimum  wage  that  he  will  accept  will  be 
governed  by  his  very  limited  power  of  holding  out  for  higher  wages, 
or  by  his  estimate  of  what  he  can  get  in  other  employments  — • 
very  few  of  which  may  be  open  to  him.  The  whole  situation  may 
be  expressed  by  the  statement  that  it  is  usually  a  matter  of  small 
importance  to  the  employer  whether  or  not  he  secures  a  particular 
laborer,  while  the  securing  of  a  particular  employment  is  often 
a  matter  of  the  very  greatest  importance  to  the  laborer.  Under 
these  conditions  wages  are  apt  to  be  fixed  much  closer  to  the 
minimum  which  the  laborer  will  take  than  to  the  ma'ximum  which 
the  employer  will  pay.  Where  laborers  can  bargain  in  groups 
rather  than  as  individuals,  their  disadvantages  are  greatly  lessened. 
The  fundamental  motive  underlying  the  organization  of  labor 
unions  has  been  to  secure  the  advantages  of  collective  bargaining. 

Wages  and  Efficiency.  —  That  wages  vary  with  the  efficiency  of  individual 
laborers  is  a  fact  of  common  observation.  Wages  are  paid  for  the  products 
of  individual  laborers  (or,  under  collective  bargaining,  for  the  products  of 
groups  of  laborers),  and  the  amount  of  a  laborer's  product  obviously  depends 
very  largely  upon  his  efficiency.  Some  writers  have  even  gone  so  far  as  to 
speak  of  "no-rent"  laborers,  — the  least  efficient  ones,  — and  to  press  the 
analogy  between  the  differential  gain  which  the  more  efficient  laborers  get 
and  the  rent  of  land.  This  procedure  is,  however,  more  confusing  than  useful 
in  the  explanation  of  wages.  So  far  as  the  distribution  of  laborers  according 
to  their  efficiency  is  concerned,  there  seems  to  be  a  common  impression  to  the 
effect  that  it  is  of  a  kind  that  could  be  represented  graphically  by  a  pyramid, 
the  least  efficient  and  relatively  most  numerous  classes  forming  the  base  of 
the  pyramid,  and  the  numbers  growing  constantly  smaller  and  smaller 
as  the  scale  of  efficiency  ascends.  Now  unless  we  beg  the  whole  question 
of  the  relation  of  wages  to  efficiency  by  assuming  that  efficiency  is  measured 
by  the  ability  to  get  high  wages,  we  will  find  it  very  difficult  to  get  a  definite 
statistical  test  of  the  distribution  of  efficiency  among  men.  For  when  we 
speak  of  efficiency,  we  usually  mean  either  efficiency  for  a  particular  purpose, 
or  a  combination  of  physical,  mental,  and  moral  qualities,  —  "  general  sagacity 
and  energy, "  as  Professor  Marshall  has  put  it.  There  is,  however,  one 
ascertained  fact  of  great  significance,  and  that  is  that  the  distribution  of  such 
physical  and  mental  characteristics  of  men  as  have  been  measured  and  tabu- 
lated in  statistical  form  seem  to  conform  more  or  less  closely  to  what  is  known 
as  the  "normal  law  of  error,"  *  or  the  "normal  frequency  curve." 

1  So  named  because  it  expresses  the  accuracy  of  such  things  as  a  large  number 
of  shots  at  a  target,  or  a  large  number  of  astronomical  observations  on  the  position 
of  a  fixed  star. 


THE   WAGES   OF   LABOR 


383 


Assume,  for  illustration,  that  we  are  dealing  with  the  measurements  of 
the  stature  of  a  large  number  of  men.  Let  all  the  different  degrees  of 
stature  be  represented  by  successive  points  on  the  line  AAz,  (Fig.  i).  so 


Q  P      0  S. 

FIG.  i 

that  the  least  height  will  be  at  A  and  the  greatest  at  AI.  Then  let  vertical 
distances  measured  upward  from  these  points  represent  the  relative  number 
of  men  found  to  be  of  each  of  these  different  degrees  of  stature.  Thus  the 
relative  number  of  men  of  height  P  is  represented  by  the  length  of  the  line 
PG,  while  the  line  QH  represents  the  relative  number  of  men  of  stature  Q. 
The  curve  AA\A%,  which  connects  the  tops  of  all  these  imaginary  vertical 
lines,  represents  the  distribution  according  to  stature  of  all  the  men  meas- 
ured. Two  important  characteristics  of  this  curve  will  be  noted:  first,  the 
most  commonly  found  stature  is  the  medium  or  average  stature,  while  ex- 
tremely tall  or  extremely  short  men  are  the  least  frequent ;  second,  the  curve 
is  symmetrical ;  that  is,  as  many  men  are  found  to  be  20  per  cent  shorter 
than  the  average  as  are  found  to  be  20  per  cent  taller  than  the  average. 
The  curve  BB\B%  is  precisely  the  same  sort  of  curve,  and  it  represents  the 
measurements  of  just  as  many  men  (for  its  area  is  the  same  as  that  of  the 
curve  AA\A%),  but  it  is  constructed  on  the  assumption  that  stature  is  only 
half  as  variable  as  is  assumed  in  the  curve  AA\A%.  This  assumption  would 
mean  that  men  were,  with  respect  to  stature,  concentrated  more  closely 
around  the  average  than  is  indicated  by  the  first  curve.  Not  only  with 
respect  to  physical  measurements  of  various  kinds  (such  as  of  cranial  capac- 
ity, or  of  the  ratio  of  length  of  the  head  to  its  breadth),  but  also  with  respect 
to  measurements  of  many  specific  kinds  of  mental  efficiency  '  men  are  found 
to  be  distributed  with  "  normal  frequency."  It  follows  that  the  most  prob- 
able kind  of  distribution  of  men  with  respect  to  the  complex  of  physical, 
mental,  and  moral  qualities,  included  under  the  general  term  "efficiency," 
is  something  closely  approximating  this  normal  type.  If  the  curve 

1  Cf.  E.  L.  Thorndike,  Mental  and  Social  Measurements,  especially  page  59. 


384 


OUTLINES   OF  ECONOMICS 


represents  the  distribution  of  men  according  to  their  efficiency,  we  may 
assume  that  those  represented  by  the  part  of  the  area  to  the  left  of  a  certain 
line  (HQ,  for  example)  are  those  who  are  below  the  level  of  social  utiliza- 
tion, including  the  physically  and  mentally  defective  and  the  morally  delin- 
quent classes.  Similarly,  those  represented  by  the  area  to  the  right  of  the 
line  IR  would  include  the  most  efficient  members  of  the  population,  the 
individuals  of  exceptional  ability.  When  one  speaks  of  "  commonplace 
mediocrity  "  he  has  in  mind  its  relatively  greater  frequency. 

Figure  2  is  based  upon  a  table  which  shows  the  weekly  wages  received 
in  1900  by  160,000  employees  in  30  industries,  including  textile  mills,  wood 


22 
20 
18 
16 

E" 

012 

£10 

8 
C 
4 
•I 
0 

FT 

1 

2 

J 

1 

C 
L 

< 

246 

S    10   12  14   1C    18   20   22    24   26   28  30  32  34  36   38   40  12   11  16   18  W 
WEEKLY  WA«E8  IN  DOLORS 

FIG.  2 

working,  metal  working,  and  miscellaneous  industries.1  In  this  diagram 
the  horizontal  line  represents  the  various  weekly  wages  received  (greater 
than  two  dollars  and  less  than  fifty  dollars  a  week)  classified  in  two-dollar 
groups.  The  vertical  distances  represent  in  each  case  the  proportion 
of  the  total  number  of  employees  who  received  the  wage  specified.  Thus 
the  diagram  shows  that  over  23  per  cent  of  the  employees  were  paid 
between  eight  and  ten  dollars  a  week,  and  that  over  5  per  cent  received 
between  eighteen  and  twenty  dollars  per  week.  If  wages  varied  exactly 
according  to  efficiency,  we  would  expect  that  this  diagram  would  follow  the 
general  pattern  of  the  normal  frequency  curve  shown  in  Figure  i.  There 
are,  however,  some  noticeable  differences.  The  median  wage  (the  wage 
which  divides  the  whole  number  of  employees  into  two  halves,  one  half 
receiving  more  and  one  half  receiving  less  than  the  median  wage),  which  is 
in  this  case  about  $10.50,  was  not  located  at  the  point  of  greatest  frequency, 

1  The  statistics  were  gathered  by  the  United  States  Census  Office  and  printed 
in  the  special  report  of  the  Twelfth  Census  on  Employees  and  Wages.  The 
tabulation  on  which  the  diagram  is  based  is  taken  from  an  article  on  "The 
Variability  of  Wages,"  by  Professor  H.  L.  Moore,  in  the  Political  Science  Quar- 
terly, Vol.  XXII,  p.  67.  See  also  an  article  by  Professor  Moore  on  "The 
Efficiency  Theory  of  Wages,"  Economic  Journal,  Vol.  XVII,  p.  571. 


THE   WAGES   OF   LABOR  385 

as  is  true  of  the  normal  frequency  curve,  but  somewhat  above  it.  The 
average  wages  (the  quotient  obtained  by  dividing  the  total  amount  paid  in 
wages  by  the  number  of  employees)  was  still  higher,  amounting  to  about 
$11.50.  The  diagram  is  not  symmetrical,  but  shows  a  concentration  of 
employees  in  the  lower  wage  groups,  and  a  relatively  greater  variation  or 
"  dispersion  "  in  the  case  of  those  receiving  higher  wages.  This  suggests 
that  either  differences  in  wages  are  not  so  great  in  the  lower  wage  groups 
as  differences  in  efficiency,  or  that  differences  in  wages  in  the  higher  wage 
groups  are  greater  than  differences  in  efficiency.  In  general,  differences  in 
wages  seem  to  increase  more  rapidly  than  differences  in  efficiency  as  the 
scale  of  efficiency  ascends.  If  wages  are  paid  for  the  productivity  of  the 
individual  workman,  and  if  productivity  varies  with  efficiency,  what  is 
the  explanation  of  this  difference  between  the  distribution  of  efficiency  and 
the  distribution  of  wages? 

First,  it  should  be  noted  that  the  normal  frequency  curve  only  applies 
to  so-called  "natural"  efficiency,  made  up  of  inherited  qualities.  Actual 
productive  efficiency  is  a  product  not  only  of  natural  efficiency,  but  also  of 
training,  and  this  acquired  element  of  specialized  skill  is  more  important  in 
the  case  of  the  better  workmen  than  in  the  case  of  the  less  efficient.  In  the 
second  place,  higher-paid  workmen  are  in  better-organized  trades,  and  gain 
more  than  do  the  others  from  the  advantages  of  collective  bargaining.  In  the 
third  place,  when  we  speak  of  the  productivity  of  a  laborer  as  a  fundamental 
thing  determining  his  wages,  we  have  in  mind  the  amount  of  product  imputed 
to  the  laborer  —  the  amount  by  which  the  total  product  would  be  decreased 
if  his  labor  were  not  utilized.  This  amount  depends  not  only  upon  the 
efficiency,  natural  and  acquired,  of  the  laborer,  but  also  (on  account  of  the 
law  of  diminishing  productivity)  upon  the  extent  to  which  the  employer 
finds  it  profitable  to  utilize  labor  rather  than  capital  or  land.  This,  on 
account  of  the  fact  that  the  sale  of  labor  is  analogous  to  a  "forced  sale,"  is 
apt  to  be  determined  largely  by  the  supply  of  labor  in  each  employment. 
So  far  as  the  supply  of  labor  in  the  better-paid  trades  is  restricted  through  the 
limitation  of  apprenticeship,  or  through  other  means,  the  marginal  produc- 
tivity of  labor  in  other  employments  is  (since  the  restriction  of  the  supply  of 
labor  in  any  one  employment  necessitates  a  corresponding  increase  of  the 
supply  in  some  other  employments)  relatively  decreased.  These  three  con- 
siderations account,  at  least  partially,  for  the  difference  between  the  dis- 
tribution of  wages  and  the  probable  distribution  of  natural  efficiency. 

QUESTIONS   AND   EXERCISES 

i.  How  far  are  wages  determined  by  the  productivity  of  labor  ?  In  what 
different  ways  do  wages  affect  the  productivity  of  labor?  What  meaning, 
or  meanings,  do  you  attach  to  the  word  "  productivity "  in  the  foregoing 

questions  ? 


386  OUTLINES  OF  ECONOMICS 

2.  Why  are  the  wages  of  men  higher  than  the  wages  of  women  in  the  same 
employments  ? 

3.  Make  a  short  outline,  or  table,  of  the  factors  determining  the  supply 
and  demand  of  labor. 

4.  Are  wages  paid  as  a  reward  for  the  irksomeness  of  labor?     Are  they 
paid  on  account  of  the  scarcity  of  labor? 

5.  Some  economists  have  held  that  "a  demand  for  commodities  is  not  a 
demand  for  labor."     Discuss  this  statement. 


REFERENCES 

CARVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  IV. 

CLARK,  J.  B.     The  Distribution  of  Wealth,  Chaps.  VII  and  VIII. 

DAVIDSON,  JOHN.     The  Bargain  Theory  of  Wages. 

FETTER,  F.  A.     Principles  of  Economics,  Chaps.  XX-XXVI. 

FLUX,  A.  W.     Economic  Principles,  Chap.  VIII. 

MARSHALL,  ALFRED,  Principles  of  Economics,  4th.  ed.,  Book  VI,  Chaps.  I-V. 

TAUSSIG,  F.  W.     Wages  and  Capital. 

THOMPSON,  H.  M.     The  Theory  of  Wages. 


CHAPTER    XXIII 
LABOR   PROBLEMS 

WHATEVER  maybe  the  economic  law  in  accordance  with  which 
wages  are  fixed,  it  must  be  vitalized  or  expressed  by  the  conscious 
efforts  of  human  agents.  For  instance,  it  is  frequently  said  that 
the  price  of  labor  is  determined  by  the  law  of  demand  and  supply. 
This  may  be  true,  but  the  law  of  demand  and  supply  is  animated 
by  no  mystical  or  occult  force;  it  must  be  enforced  by  active,  in- 
telligent men,  keen  enough  to  know  their  own  interest,  and  bent 
upon  pursuing  it.  Men  must  take  advantage  of  the  economic 
forces  working  to  their  advantage,  or  they  will  lose  their  advantage. 

Types  of  Labor  Organizations.  —  One  of  the  most  important 
agents  now  occupied  in  giving  effect  to  the  economic  laws  which 
control  wages  is  the  labor  organization.  There  are  at  least  three 
distinct  types  of  labor  organizations :  the  Trade  Union,  represent- 
ing a  combination  of  wage  earners  in  a  single  trade  or  two  or 
three  closely  related  trades;  the  Industrial  Union,  composed  of 
all  kinds  of  wage  earners  working  in  a  given  industry;  and  the 
mixed  Labor  Union,  made  up  of  wage  earners  from  many  trades 
and  many  industries.  Thus,  the  Brotherhood  of  Locomotive  En- 
gineers, a  strict  trades  union,  makes  no  attempt  to  include  other 
workers  in  the  railway  service;  the  United  Mine  Workers,  how- 
ever, an  industrial  union,  attempts  to  combine  all  persons  work- 
ing in  and  around  the  mines;  while  the  Knights  of  Labor,  in  the 
period  of  its  strength  and  prosperity,  fused  all  sorts  and  condi- 
tions of  workers  in  some  of  its  district  assemblies,  and  combined 
these  assemblies  in  a  closely  knit,  highly  centralized  national 
organization. 

The  difference  in  the  structure  of  labor  organizations  colors  their 
policies  and  gives  rise  to  important  problems.  The  trade  and  in- 

387 


388  OUTLINES   OF  ECONOMICS 

dustrial  unions  are,  as  we  should  expect,  much  more  homogeneous 
and  therefore  much  more  efficient  than  the  labor  unions,  but  they 
are  likely  to  be  narrower  in  their  aims  and  more  selfish  in  their 
policies.  The  labor  unions,  on  the  other  hand,  have  in  the  past 
proved  much  less  efficient,  much  more  unwieldy,  and  much  more 
disposed  to  make  use  of  cooperation,  political  action,  and  other 
devices  which  are  not  suited  to  associations  of  wage  earners,  or  at 
least  not  easily  handled  by  them. 

The  most  important  problem  growing  out  of  the  structure  of 
labor  organizations  is  known  as  the  jurisdiction  dispute.  Thus 
the  Knights  of  Labor,  having  received  into  their  membership  a 
large  number  of  cigar  makers,  fell  into  a  sharp  dispute  with  the 
regular  International  Cigar  Makers'  Union,  whose  cause  was  natu- 
rally espoused  by  the  American  Federation  of  Labor.  In  more 
recent  years  bitter  quarrels  have  taken  place  between  the  trade 
and  industrial  unions.  The  United  Brewery  Workers,  for  in- 
stance, an  industrial  union,  has  been  quarreling  for  years  with  the 
trade  organizations  among  the  painters,  the  coopers,  and  the  sta- 
tionary firemen.  The  American  Federation  of  Labor,  to  which 
most  of  these  organizations  belong,  has  usually  favored  the  trades 
unions  in  these  disputes,  and  has  recently  ordered  all  coopers, 
painters,  and  teamsters  in  the  Brewery  Workers'  Union  to  join 
the  trades  unions  in  their  respective  crafts. 

For  the  larger  and  more  general  objects  common  to  wage 
workers  as  a  body,  many  of  the  American  unions  have  combined 
in  a  large,  loosely  knit  confederacy,  known  as  the  American  Fed- 
eration of  Labor.  This  organization  interferes  just  as  little  as 
possible  with  the  constituent  unions,  and  confines  its  activity  to 
securing  favorable  labor  laws,  organizing  trades  in  districts  of  the 
country  in  which  trades  unions  have  heretofore  failed  to  get  a  start, 
rendering  assistance  to  unions  which  are  hard  pushed  in  strikes  or 
other  disputes  with  employers,  encouraging  the  use  of  union-label 
goods,  and,  in  short,  to  furthering  all  those  interests  which  labor 
organizations  have  in  common.  In  recent  years  the  American 
Federation  of  Labor  has  grown  with  extraordinary  rapidity.  The 
present  (1908)  membership  is  about  2,000,000. 

The  Economic  Justification  of  Labor  Organizations.  —  The 


LABOR  PROBLEMS  389 

question  is  often  asked  why  labor  organizations  are  neces- 
sary, in  view  of  the  fact  that  wages  are  fixed,  at  least  within  broad 
limits,  by  deep-lying  economic  and  social  forces  which  the  labor 
organization  cannot  effectively  control.  If  wages  depend  upon 
demand  and  supply,  it  is  said,  what  excuse  for  the  troublesome 
and  irritating  trades  union  ? 

The  answer  has  been  partially  stated  above.  Economic  laws 
work  themselves  out  through  men  and  through  organizations  — 
they  are  not  self-enforcing.  We  have  had  labor  organizations  of 
one  kind  and  another  ever  since  the  wage  system  existed,  and  we 
shall  unquestionably  continue  to  have  such  organizations  until  the 
wage  system  is  superseded  by  something  more  satisfactory. 

There  are,  however,  additional  reasons  for  the  existence  of  the 
labor  organization.  Wages,  we  say,  are  measured  by  the  mar- 
ginal productivity  of  labor.  This  productivity,  in  turn,  is  partially 
dependent  upon  the  demand  and  supply  of  labor.  But  the  sup- 
ply of  labor  is  largely  controlled,  as  we  have  seen,  by  the  standard 
of  life;  and  one  of  the  great  functions  of  the  labor  organizations  is 
to  strengthen  and  advance  the  standard  of  life.  If  a  great  horde 
of  unorganized  and  unsympathetic  wage  earners  are  continually 
bidding  against  one  another  in  the  labor  market,  each  individual 
endeavoring  to  get  a  little  more  work  by  offering  to  take  a  little 
less  pay,  the  standard  of  living  will  be  subtly  undermined,  "nib- 
bled away,"  as  a  well-known  writer  has  expressed  it.  The  labor 
organization,  by  repressing  the  vicious  activity  of  this  competition, 
by  compelling  its  members  to  offer  the  same  terms  and  abide  by 
common  or  standard  rules,  bulwarks  the  standard  of  life,  and  gives 
it  increased  precision,  increased  power  and  durability.  In  addi- 
tion, most  unions  endeavor  to  exercise  a  more  direct  and  positive 
influence  upon  the  supply  of  labor,  by  limiting  the  number  of 
apprentices,  helpers,  and  other  persons  entering  the  trade.  These 
efforts,  however,  are  not  always  successful. 

Current  economic  doctrine  recognizes  at  least  one  other  legiti- 
mate function  of  the  labor  organization.  In  actual  life  there  is 
always  a  margin  between  the  actual  productivity  of  the  wage 
earner  and  the  amount  which  he  receives  as  wages.  The  em- 
ployer cannot  pay  the  worker  all  the  latter  makes;  if  he  did,  he 


390  OUTLINES   OF  ECONOMICS 

would  have  no  profits.  By  stout  resistance  and  skillful  bargain- 
ing it  is  possible  for  the  wage  worker  to  get  a  part  of  that  share  of 
the  product  which  in  the  past  has  gone  to  the  employer  as  profits. 
Of  course,  that  labor  organization  will  be  most  successful  in  the 
long  run  which  increases  the  productivity  of  its  members,  and 
thus  creates  a  larger  product  to  be  distributed  among  all  the  fac- 
tors of  production.  But  even  if  the  organization  does  not  increase 
the  productivity  of  its  members,  it  has  a  chance  to  improve  their 
wages  by  trenching  upon  profits.  Mere  bargaining,  therefore,  de- 
spite the  operation  of  more  fundamental  economic  forces,  is  still 
exceedingly  important.  And  the  unorganized  wage  worker,  being 
a  poor  bargainer,  combines  with  his  fellow- workmen,  not  only  to 
maintain  a  more  uniform  price  for  their  labor,  but  in  order  to 
procure  the  guidance  and  assistance  of  an  expert  bargainer  —  the 
business  agent  or  walking  delegate.  The  labor  organization  is 
thus  a  commerical  institution  for  the  sale  of  labor  in  large  quan- 
tities; its  primary  function  is  collective  bargaining. 

Labor  Organizations  and  Monopoly.  —  It  is  plain  that  the  labor 
organization  as  a  wholesale  jobber  of  labor  is  essentially  a  prod- 
uct of  those  familiar  economic  forces  making  for  large-scale  com- 
mercial dealings;  it  is  brother  to  the  trust,  akin  to  the  combination, 
and  thus  not  untainted  with  monopoly.  One  of  the  most  searching 
criticisms  directed  against  the  labor  organization  is  that  it  exhibits 
all  the  evil  tendencies  of  monopoly.  The  charge  has  some  ele- 
ments of  truth.  The  highest  aim  of  the  average  labor  organiza- 
tion is  to  induce  every  worker  in  the  industry  to  join  the  union, 
so  that  by  monopolizing  the  supply  of  labor  it  may  control  the 
price.  But  in  its  principal  implications  the  charge  of  monopoly 
is  misleading,  because  the  great  majority  of  unions  do  not  attempt 
to  limit  the  number  of  their  beneficiaries.  They  aim  to  increase 
wages,  but  they  are  willing  and  even  anxious  that  every  member 
of  the  craft  should  share  the  increase.  It  is  rare  for  a  labor  or- 
ganization to  exclude  from  its  ranks  a  number  of  workers  and 
then  persecute  them  by  refusing  to  work  with  them  or  treating 
them  as  scabs.  Conflicts  with  non-union  men  are  common,  but 
in  a  very  large  majority  of  cases  every  effort  has  been  made  to  get 
these  men  into  the  union.  An  organization  which  is  constantly 


LABOR   PROBLEMS  391 

exhorting  its  competitors  to  come  into  the  combination  and  share 
its  benefits  cannot  logically  be  called  a  monopoly. 

Methods  and  Policies  of  Labor  Organizations.  —  The  aims  of 
labor  organizations  and  the  policies  employed  to  achieve  their 
ends  vary  in  accordance  with  the  conditions  of  the  occupation  or 
industry  in  which  their  members  work.  Some  unions,  for  in- 
stance, lay  great  emphasis  upon  apprenticeship;  and  if  they  thus 
secure  control  of  the  supply  of  labor  in  the  trade,  find  it  necessary 
to  place  but  little  dependence  upon  strikes  and  boycotts.  On  the 
other  hand,  organizations  like  the  Brotherhood  of  Locomotive 
Engineers  find  this  question  settled  for  them;  no  one  can  perform 
the  work  of  a  locomotive  engineer  without  preliminary  training, 
and  this  natural  limitation  of  the  number  of  trained  locomotive 
engineers  makes  it  possible  for  their  union  to  get  along  without 
maintaining  either  apprenticeship  regulations  or  the  policy  of  the 
closed  shop.  And  for  years  it  has  not  indulged  in  a  strike.  An 
admirable  system  of  mutual  insurance  and  simple  collective  bar- 
gaining are  sufficient  to  keep  the  membership  loyal  and  obtain 
from  employers  fair  rates  of  pay. 

In  the  unskilled  trades,  on  the  other  hand,  where  a  period  of 
apprenticeship  is  wholly  superfluous,  some  more  artificial  protec- 
tion of  the  standard  of  life  must  be  employed,  like  the  "policy  of 
the  closed  shop"; *  and  this  naturally  forces  the  union,  in  turn,  to 
place  great  dependence  upon  the  strike  and  boycott.  Before  con- 
demning a  union  for  employing  some  of  these  policies,  therefore, 
or  contrasting  it  unfavorably  with  highly  conservative  unions,  like 
the  Railway  Brotherhoods,  it  is  necessary  to  inquire  whether  or 
not,  like  the  Railway  Brotherhoods,  it  is  protected  by  some  natu- 
ral condition  of  the  business,  which  makes  peaceable  collective 
bargaining  comparatively  easy. 

It  is  impossible  to  pass  any  general  verdict  upon  the  justice  of 
the  closed-shop  policy.  Most  Americans  are  inclined  to  condemn 

1  The  familiar  union  rule  prohibiting  members  of  the  union  from  working  with 
non-union  men.  The  policy  is  very  elastic.  No  objection  is  made  to  working  with 
members  of  an  occupation  not  yet  organized;  some  unions  apply  the  ban  only  to 
non-union  men  in  the  same  trade  or  craft ;  while  others  practically  refuse  to  work 
for  an  employer  who  hires  any  non-union  men  at  all  (not  applying  the  term 
"non-union  men"  to  laborers,  porters,  and  other  unorganized  workers). 


392  OUTLINES    OF   ECONOMICS 

it  offhand  as  an  attempt  to  deprive  the  non-union  man  of  his 
"sacred  right  to  work."  They  forget  that  the  union  man  en- 
forces the  closed-shop  policy  by  an  exercise  of  his  "sacred  right 
of  quitting  work."  Except  where  violence  is  employed,  the  union 
which  is  attempting  to  enforce  a  closed-shop  policy  threatens  to 
do  nothing  worse  than  direct  its  members  to  quit  the  employment 
of  the  proprietor  of  the  open  shop  in  question.  Two  equally 
"sacred  and  inalienable  rights"  clash  in  this  contest,  and  it  is 
plain  that  no  decision  concerning  the  legitimacy  of  the  closed-shop 
policy  can  be  determined  by  reference  to  a  philosophy  of  rights. 
If  we  would  know  whether  a  strike  against  non-union  men  is  jus- 
tifiable or  unjustifiable,  we  must  inquire  into  all  the  surrounding 
circumstances  and  the  manner  in  which  the  strike  is  conducted. 
If  the  strike  is  conducted  peaceably,  and  if  the  union  in  question 
is  an  open  union,  cordially  inviting  the  "scabs"  to  enter  and 
share  its  benefits;  if  the  rate  of  wages  and  other  conditions  of 
employment  demanded  by  the  union  men  are  reasonable  in  view 
of  the  cost  of  living  and  other  similar  conditions;  if  the  "scabs" 
involved,  by  accepting  less  than  a  living  wage  or  other  harmful 
conditions  of  employment,  are  working  —  even  though  of  necessity 
—  to  undermine  the  American  standard  of  living;  then  we  have 
no  hesitation  in  saying  that  the  employment  of  the  closed-shop 
policy  on  the  part  of  the  union  is  thoroughly  justifiable. 

We  are  much  too  prone  in  a  case  like  this  to  see  only  the  injury 
done  to  the  non-union  man,  forgetful  of  the  fact  that  the  non- 
union man  does  a  real  injury  to  his  fellow- workers  by  accepting 
wages  or  other  conditions  of  employment  that  are  inconsistent 
with  the  American  mode  of  living.  The  price  cutter  in  the  labor 
market  is  not  ordinarily  a  social  benefactor.  The  weakest,  dull- 
est, and  least  enterprising  laborer  exerts  an  influence  upon  the 
general  level  of  wages  out  of  all  proportion  to  his  importance  or 
his  deserts.  If  this  be  true,  the  man  who  cuts  the  standard  rate 
of  wages  may  do  a  grave  social  injury,  and  there  is  justification  for 
those  who  peaceably  combine  to  prevent  him  from  doing  his  de- 
structive work.  It  must  be  remembered,  however,  that  these  con- 
clusions are  based  upon  the  assumption  that  the  union  is  an  open 
union  and  that  the  strike  is  conducted  without  intimidation  or 


LABOR   PROBLEMS  393 

interference  with  the  non-union  men.  The  moment  the  union 
stoops  to  violence,  that  moment  it  loses  all  claim  to  the  support  of 
an  enlightened  public  opinion. 

Another  policy  which  is  generally,  and  in  many  cases  unjustly, 
condemned  is  the  regulation  of  output,  systematically  practiced 
and  indorsed  by  most  unions.  The  output  of  the  worker  is  lim- 
ited in  many  ways.  The  reduction  of  the  hours  of  labor,  the  limi- 
tation of  wages  which  some  unions  working  by  the  piece  system 
enforce,  the  prohibition  or  penalization  of  overtime,  all  operate 
to  check  the  activity  or  reduce  the  output  of  the  particular  work- 
man. Here,  again,  it  is  unsafe  to  render  any  general  verdict  upon 
the  legitimacy  of  the  policy  in  question.  In  some  industries  in 
which  the  piece  system  is  employed,  the  rate  per  piece  has  unques- 
tionably been  forced  down  and  the  workers  spurred  to  excessive 
exertion  by  the  pressure  and  influence  of  pace  makers  or  task 
masters,  paid  by  the  employers  to  urge  the  workers  to  the  utmost 
speed.  Where  such  conditions  prevail,  no  one  can  successfully 
question  the  justice  of  the  feeling  which  leads  the  union  to  object 
to  the  presence  of  pace  makers  and  to  prescribe  a  maximum  wage 
—  usually  above  that  secured  by  the  average  workman  —  which 
union  members  are  not  permitted  to  exceed.  In  general,  it  is  plain 
that  an  individual  laborer  may  underbid  a  competitor  by  working 
more  intensely,  as  well  as  by  offering  to  work  longer  hours  or  at 
lower  pay.  On  this  account  alone,  trades  unions  are  justified  in 
defining  and  maintaining  some  regular  pace  or  standard  intensity 
of  work.  Without  such  definition,  collective  bargaining  would  be 
impossible.  This  last  observation,  it  will  be  noted,  applies  only 
to  trades  working  by  the  day.  But  even  where  the  piece  system 
is  used,  the  workers  may  be  justified  in  fixing  a  liberal  limit  to  the 
amount  of  piecework  which  the  wage  earner  shall  be  permitted  to 
do  in  a  day.  For  there  can  be  no  question  that  unregulated  piece- 
work does  stimulate  the  worker  to  excessive  exertion,  and  that  as 
daily  earnings  under  the  piece  system  tend  to  rise,  the  employer 
is  tempted  to  reduce  the  rates. 

Some  methods  of  restriction,  however,  are  wholly  vicious.  The 
Journeyman  Stone  Cutters'  Union,  for  instance,  stoutly  resisted 
for  years  the  application  of  machinery  to  their  work,  and  actually 


394  OUTLINES   OF  ECONOMICS 

attempted  to  prevent  the  shipment  of  machine-planed  stone  into 
any  city  where  the  union  had  succeeded  in  preventing  the  intro- 
duction of  planers.  Such  an  attitude  toward  the  introduction  of 
labor-saving  devices  deserves  the  severest  condemnation.  More- 
over, in  some  unions  there  is  a  tacit  approval  of  the  "  go-easy  " 
system,  the  system  of  "  soldiering,"  or  "  adulterating  labor,"  as  it 
has  been  aptly  termed.  Such  a  method  of  restricting  output  not 
only  corrupts  the  character  of  the  individual  workman  who  prac 
tices  it,  but  makes  it  impossible  for  the  employer-  to  deal  with  the 
union  as  a  seller  of  honest  goods,  and  in  this  way  tends  to  under- 
mine the  whole  foundation  of  trades  unionism,  which  is,  as  has 
been  said,  collective  bargaining.  On  the  other  hand,  there  is  no 
particular  reason  to  believe  that  union  labor  is  especially  open  to 
the  charge  of  encouraging  "  go-easy  "  habits  of  work.  The  habit 
of  stealthy  loafing  is  found  at  its  worst  in  certain  occupations  in 
which  labor  organizations  are  unknown,  so  that  when  it  appears 
among  union  workmen  it  cannot  logically  be  attributed  to  organi- 
zation alone. 

Educational  and  Fraternal  Activities.  —  Practically  all  unions 
have  important  educational  and  social  activities.  Debate  upon 
economic  topics  is  common  in  union  meetings,  particularly  at  the 
conventions  of  the  state  and  national  organizations.  It  has  even 
been  said  that  foreign-born  wage  earners  receive  their  most  help- 
ful and  vital  education  in  American  public  questions  through  the 
agency  of  the  union.  This  broad  education,  which  is  a  most  im- 
portant factor  in  elevating  the  standard  of  life,  is  supplemented  by 
the  social  activities  of  the  labor  organization.  Many  unions  main- 
tain a  so-called  "  Ladies'  Auxiliary,"  in  which  the  wives  of  the 
members  participate  ;  give  concerts,  dances,  and  other  social  en- 
tertainments, maintain  charitable  activities,  and  by  general  social 
intercourse  operate  to  unify  and  solidify  the  standard  of  life  of 
the  wage-earning  group  concerned. 

Closely  allied  with  these  educational  and  social  features  is  the 
system  of  insurance  benefits,  which  has  played  such  a  prominent 
part  in  the  development  of  labor  organizations.  In  Great  Britain 
fully  three  times  as  much  money  is  expended  by  the  unions  upon 
mutual  insurance  of  various  kinds  as  upon  administrative  activi- 


LABOR   PROBLEMS  395 

ties,  or  for  the  support  and  encouragement  of  strikes.  In  the 
year  1901,  for  instance,  eighty-nine  of  the  one  hundred  most 
prominent  British  unions  paid  funeral  benefits,  eighty-three  strike 
benefits,  seventy-seven  unemployed  benefits,  seventy-seven  sick 
or  accident  benefits,  and  thirty-eight  superannuation  benefits. 
Union  insurance  is  exceedingly  helpful,  not  only  in  stimulating 
thrift  among  the  individual  members,  but  in  making  the  union 
more  careful  and  conservative  in  its  policies.  Moreover,  it 
serves  to  keep  in  the  union  a  large  number  of  members,  who, 
if  they  had  no  financial  stake  in  continued  membership,  would 
drop  out  of  the  union  in  times  of  peace,  when  no  apparent 
advantage  was  to  be  derived  from  the  union.  All  things  consid- 
ered, the  Cigars  Makers'  International  Union  has  many  claims  to 
be  considered  the  most  successful  American  labor  organization  ; 
and  its  success  is  in  large  degree,  if  not  in  the  largest  degree,  attribu- 
table to  its  wise  and  extensive  use  of  mutual  insurance.  But  on 
the  whole,  the  American  unions  make  relatively  little  use  of  the 
insurance  benefit.  Most  of  them  pay  strike  benefits,  —  that  is  part 
of  their  fighting  policy,  —  and  perhaps  a  majority  of  them  pay 
funeral  benefits,  while  a  respectable  majority  pay  sick  benefits. 
But  the  employment  of  the  superannuation,  accident,  traveling,  or 
"  out-of-work  "  benefit  is  comparatively  rare.  The  great  majority 
of  American  unions  are  militant  in  character,  existing  primarily 
for  the  purpose  of  collective  bargaining,  and  placing  the  greatest 
reliance  upon  the  policy  of  the  closed  shop  and  the  strike. 

The  Strike. : — Probably  the  most  important  weapon  of  the  trades 
union  is  the  strike.  Unfortunately,  also,  the  weapon  is  far  too 
frequently  used.  Several  generations  ago  most  trades  unions,  while 
they  vehemently  defended  their  right  to  strike,  cordially  indorsed 
arbitration  and  apparently  looked  upon  the  strike  as  a  weapon  of 
last  resort.  To-day,  the  average  trades  union  is  at  best  only  a 
lukewarm  advocate  of  arbitration,  while  it  has  come  to  regard 
striking  as  a  permanent  policy.  The  net  result  has  been  to  com- 
mercialize the  strike,  as  it  were.  Instead  of  being  a  more  or  less 
spontaneous  outburst  against  conditions  which  the  workingman 
regarded  as  unrighteous  and  oppressive,  the  strike  has  come  to  be 
a  commonplace  method  of  bettering  conditions  of  employment ; 


396  OUTLINES   OF  ECONOMICS 

a  device  to  be  employed  when  conditions  are  favorable,  to  be  laid 
aside  when  conditions  are  unfavorable,  but  to  be  used  without 
regard  to  ethical  consideration  when  its  use  appears  to  be  profit- 
able. As  a  result  in  this  change  in  policy,  strikes  appear  to  be 
increasing  steadily  in  the  United  States,  as  may  be  seen  in  the 
statistics  quoted  on  the  following  pages. 

While  these  statistics  fluctuate  in  a  very  irregular  way,  there  can  be  no 
doubt  that  they  show  a  decided  increase  in  the  number  of  strikes,  strikers, 
and  employees  thrown  out  of  work  by  strikes.  Moreover,  comparison  of  the 
number  of  employees  thrown  out  of  work  with  the  general  wage-earning 
population  indicates,  although  not  so  certainly,  that  the  proportion  of  work- 
ingmen  annually  involved  in  strikes  has  been  slowly  increasing  in  the  twenty- 
five  years  covered  by  the  table.  Precisely  what  is  responsible  for  this 
increase  in  strikes  is  difficult  to  determine.  The  change  in  the  attitude  of 
labor  organizations  toward  the  strike  is  an  important  factor,  no  doubt. 
But  the  greatest  reason  for  the  increase,  in  all  probability,  is  the  rapid  growth 
of  organized  labor.  New  unions  are  prone  to  strike.  The  sudden  realiza- 
tion of  their  new  power,  and  the  accumulation  of  strike  funds,  tempt  them  to 
try  their  wings.  In  the  long  run  organization  probably  exerts  a  conservative 
and  steadying  influence:  national  machinery  is  created  which  curbs  the 
capricious  impulses  of  the  local  unions ;  experienced  men  are  usually  elected 
to  the  more  important  national  offices,  and  when  they  are  called  in  to  settle 
a  local  grievance,  they  arrive  upon  the  scene  of  action  without  personal  re- 
sentment against  the  employers  involved.  These  facts  create  a  strong  hope, 
and,  indeed,  a  confident  belief,  among  many  of  those  who  have  studied  the 
labor  question,  that  when  practically  all  American  trades  are  organized, 
strikes  will  steadily  decrease  as  they  have  in  England,  where  a  much  larger 
part  of  the  wage-earning  population  is  organized  than  in  this  country. 

Labor  leaders  maintain  that  strikes  strengthen  the  solidarity  of 
the  unions,  and  encourage  the  members  to  make  personal  sacri- 
fices for  the  common  good,  while  they  force  employers  to  respect 
the  strength  of  organized  labor,  and  are  not,  in  the  long  run,  par- 
ticularly costly.  The  time  lost  in  strikes,  they  say,  merely  takes 
the  place  of  enforced  vacations,  seasonal  stoppages,  and  other  kinds 
of  unemployment  with  which  the  average  wage  earner  is  nor- 
mally visited  during  the  course  of  the  year's  work.  No  amount 
of  such  dialectic,  however,  can  argue  out  of  existence  the  injury 
and  destruction  resulting  from  strikes.  Many  strikes  are  gravely 
injurious  to  the  wage  earners  themselves  ;  and  almost  all  strikes 
injure  employers  and  the  consuming  public.  From  the  social 


LABOR   PROBLEMS 


397 


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OUTLINES   OF   ECONOMICS 


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LABOR  PROBLEMS  399 

standpoint  the  strike  is  an  evil,  and  all  justifiable  means  should  be 
employed  to  prevent  its  occurrence. 

We  must  not  conclude,  however,  that  workingmen  and  labor 
organizations  are  wholly  or  even  mainly  responsible  for  strikes. 
Indeed  there  are  reasons  to  believe  that  the  employers  are  more 
often  responsible  for  strikes  than  the  employees.  If  a  body  of 
men  agree  not  to  work  for  a  given  employer  unless  that  employer 
complies  with  certain  conditions,  whose  fault  is  it  if  the  employer 
refuses  to  comply  and  a  strike  follows?  Very  evidently  the  fault 
may  lie  with  either  the  master  or  the  men,  or  with  both.  The 
fault  lies  with  the  men  if  the  conditions  which  they  demand  are, 
in  view  of  all  the  circumstances,  unreasonable  and  extortionate. 
The  fault  lies  with  the  employer  if  he  refuses  to  grant  reasonable 
conditions  of  employment.  Sometimes  the  fault  is  with  one,  some- 
times with  the  other  ;  sometimes  the  one  gains  by  the  strike,  some- 
times the  other;  but  the  public,  which  is  never  at  fault,  stands 
always  to  lose.  The  greatest  lesson  to  be  derived  from  a  consid- 
eration of  strikes  is  the  necessity  of  their  suppression  in  the  inter- 
est of  the  general  public. 

One  of  the  greatest  evils  attendant  upon  the  strike  is  the  violence 
emanating  from  both  sides  —  from  employers'  associations  as 
well  as  from  labor  unions.  It  is  frequently  said  that  labor  vio- 
lence is  diminishing  with  the  passage  of  years.  The  statement  is 
both  true  and  untrue.  A  close  study  of  labor  disputes  in  the  early 
period  of  the  modern  labor  movement  makes  it  very  plain  that 
the  average  strike  of  that  period  was  attended  with  much  more 
violence  than  the  average  strike  of  to-day.  Most  labor  leaders 
have  thoroughly  learned  the  lesson  that  violence  does  not  pay, 
and  they  exert  every  effort  to  suppress  it.  But  at  the  same  time 
the  average  strike  of  the  present  time  is  attended  with  some  vio- 
lence or  coercion,  and  the  steady  increase  in  the  number  of  strikes 
makes  the  aggregate  volume  of  violence  now  greater  than  it  was 
in  the  past. 

Historically,  also,  a  marked  change  has  shown  itself  in  the  char- 
acter of  the  violence  employed.  In  the  past,  labor  lawlessness 
was  more  or  less  sporadic;  brutal,  it  is  true,  but  frank  and  unpre- 
meditated. The  lawlessness  of  to-day,  however,  has  taken  on  a 


400  OUTLINES   OF  ECONOMICS 

far  more  sinister  form  ;  it  has  become  deliberate,  premeditated,  in 
many  cases  official.  No  disinterested  person  can  sift  the  testi- 
mony in  the  labor  troubles  in  the  mining  industry  of  Idaho  and 
Colorado  without  admitting  that  there  has  been  a  certain  amount 
of  carefully  planned  violence  perpetrated  with  the  passive  consent, 
if  not  with  the  active  encouragement,  of  union  officials.  There 
can  be  no  doubt,  also,  that  individual  employers  and  employer 
associations  have  stooped  to  equally  reprehensible  practices.  They 
have  employed  as  watchmen  or  detectives  ex-convicts,  thugs,  arid 
professional  bad  men,  who  unquestionably  have  not  refrained  at 
times  from  perpetrating  violence  in  order  to  cast  discredit  upon 
the  unions.  It  is  impossible  to  say  who  began  the  trouble,  and 
just  as  impossible  to  conclude  which  side  is  the  most  to  blame  ; 
the  lesson  to  be  drawn  is  the  public  necessity  of  suppressing  and 
punishing  violence  or  intimidation,  when  practiced  by  either  side 
of  the  controversy. 

Employers'  Associations. — The  development  of  modern  em- 
ployers' associations  has  been  briefly  described  in  an  earlier 
chapter.  Their  activities  give  rise  to  a  movement  which  may 
be  briefly  described  as  an  anti-labor  movement.  They  are,  in 
almost  every  respect,  the  natural  foil  and  counterpoise  of  the 
labor  organization.  They  resemble  the  association  of  laborers  even 
in  structure.  Thus  we  have  employers'  associations  recruited  en- 
tirely from  one  industry,  such  as  the  Stove  Founders'  National 
Defense  Association  ;  associations  of  employers  in  distinct  but 
related  industries,  such  as  the  national  Metal  Trade  Association  ; 
and  mixed  associations  in  which  all  kinds  of  employers  are  united, 
such  as  the  Citizens'  Alliances,  so  common  now  in  many  of  the 
Western  cities.  To  complete  the  analogy,  these  associations  are 
combined  in  city,  state,  and  national  federations;  thus  forming 
large  confederacies,  similar  in  scope  and  activity  to  the  state  and 
national  federation  of  labor. 

We  find  the  same  resemblances  between  employers'  associa- 
tions and  labor  organizations  when  we  examine  the  policies  and 
aims  of  the  former.  Thus  they  make  frequent  use  of  the  lock- 
out ;  the  Stove  Founders'  National  Defense  Association,  for 
example,  began  its  interesting  career  with  a  lockout  of  the  iron 


LABOR   PROBLEMS  40! 

molders  in  the  employ  of  its  members.  Like  the  trades  unions, 
also,  they  have  their  legislative  committees  or  lobbies,  and  are 
credited,  for  instance,  with  having  played  an  important  part 
in  defeating  the  eight-hour  and  anti-injunction  bills  which 
have  been  before  Congress  several  times.  Some  of  these  or- 
ganizations also  maintain  so-called  labor  bureaus,  whose  func- 
tion it  is  to  secure  accurate  information  of  the  workmen  in 
the  trade,  so  that  troublesome  agitators  may  be  refused  em- 
ployment ;  and  the  methods  employed  in  this  branch  of  the 
work  gives  rise  to  something  closely  akin  to  the  "unfair  list "  pub- 
lished by  the  American  Federation  of  Labor  and  many  national 
unions.  Some  of  the  more  radical  associations  have  stooped  at 
times  to  violence  and  coercion,  as  was  illustrated  in  1904  by  the 
employers'  associations  of  the  Cripple  Creek  district  which  boy- 
cotted business  firms,  forced  public  officials  to  resign  by  threats 
or  violence,  and  filled  the  vacant  places  with  their  own  adherents. 
Some  of  the  employers'  associations,  like  the  Stove  Founders' 
National  Defense  Association,  are  conservative  in  tone  and  policy, 
working  harmoniously  with  the  labor  organizations  in  the  industry, 
and  going  no  farther  than  to  endeavor  by  every  legitimate  meas- 
ure to  further  the  interest  of  the  affiliated  employers.  Such  asso- 
ciations are  exceedingly  helpful  in  furthering  that  regime  of  peace- 
able collective  bargaining  to  which  most  students  of  this  subject 
look  forward  as  the  ultimate  outcome  of  present-day  tendencies. 
They  are  thus  doing  in  an  effective  way  the  work  of  industrial 
peace.  Another  group,  however,  illustrated  by  the  National  Metal 
Trades  Association,  while  they  are  temperate  in  tone  and  wage  no 
warfare  on  the  labor  organization  as  such,  nevertheless  maintain 
certain  fundamental  principles  which  are  directly  in  conflict  with 
the  fundamental  tenets  of  trades  unionism.  These  associations,  for 
instance,  maintain  that  the  method  of  wage  payment  —  i.e.  whether 
wages  shall  be  reckoned  by  the  hour,  the  piece,  or  the  premium 
system  —  is  a  matter  which  concerns  the  employer  alone,  and 
they  refuse  to  submit  such  questions  to  collective  bargaining  or 
arbitration.  Associations  in  the  second  group  do  not  needlessly 
foment  strifes  with  the  unions,  but  they  regard  industrial  peace 
as  a  consideration  secondary  to  the  maintenance  of  their  funda- 

2D 


402  OUTLINES   OF  ECONOMICS 

mental  principles,  and  accordingly  they  have  been  involved  in  a 
number  of  protracted  strikes  and  disputes.  Finally,  there  is  a 
third  group  of  employers'  associations,  of  which  the  average  citi- 
zens' alliance  is  a  good  example,  which  may  be  correctly  described 
as  "  union  smashers."  Such  associations  have  little  regard  for 
the  establishment  of  sound  principles  of  collective  bargaining,  and 
they  are  usually  violently  opposed  to  any  recognition  of  organized 
labor ;  their  aim  is  to  weaken  and  harass  their  enemy,  the  labor 
organization,  whenever  possible. 

Owing  to  this  difference  of  policy  among  the  various  employers' 
associations,  it  is  difficult  to  predict  how  the  anti-labor  movement 
will  affect  that  question  in  which  the  public  interest  is  greatest  — 
the  question  of  industrial  peace.  For  some  little  time,  perhaps, 
the  militant  enthusiasm  of  the  more  belligerent  associations  will 
probably  result  in  multiplying  strikes  and  lockouts.  In  the  end, 
however,  they  will  probably  contribute  effectively  to  the  mainte- 
nance of  industrial  peace  by  checking  the  more  extortionate  de- 
mands of  the  unions  and  by  securing  that  degree  of  organization 
among  employers  which  is  necessary  for  the  successful  operation 
of  collective  bargaining.  If  wage  earners  are  to  act  in  concert  by 
common  or  standard  rules,  it  is  evident  that  eventually  they  will 
have  to  deal  with  an  organized  body  of  employers  ;  and  the  sooner 
such  organization  of  employers  is  perfected,  the  sooner  will  col- 
lective bargaining  be  established  as  the  regular  method  of  deter- 
mining conditions  of  employment. 

The  Agencies  of  Industrial  Peace.  —  Although  collective  bar- 
gaining does  not  necessarily  and  in  every  instance  operate  to  dis- 
courage strikes,  its  net  influence  is  unquestionably  favorable  to 
the  maintenance  of  industrial  peace.  Where  a  powerful  trades 
union  exists,  and  the  employers  resolutely  refuse  to  deal  with  it, 
strikes  are  frequent.  Where  the  opposite  policy  is  pursued,  and 
the  employers  frankly  recognize  the  union,  strikes  are  infrequent. 
Thus,  there  has  been  no  great  trouble  for  years  in  the  stove  foundry, 
bituminous  mining,  and  newspaper  publishing  industries,  in  which 
general  conventions  between  the  respective  labor  and  employers' 
organizations  are  regularly  held  for  the  adoption  of  terms  of  em- 
ployment for  the  ensuing  year. 


LABOR  PROBLEMS  403 

Trade  Arbitration.  —  In  England,  many,  if  not  most,  of  these 
recurrent  conferences  are  based  upon  formal  treaties,  which  pro- 
vide for  arbitration  in  case  the  two  parties  cannot  come  to  an 
agreement  concerning  terms.  This  is  frequently  referred  to  as 
trade  arbitration.  But  in  the  United  States  most  of  the  general 
conferences  are  based  upon  agreements  which  do  not  provide  for 
arbitration  at  all.  Peace  is  maintained,  although  neither  side 
promises  in  any  way  to  refrain  from  strikes  or  lockouts.  Mutual 
respect  and  free  discussion  prevent  actual  warfare.  Indeed,  many 
authorities  upon  this  subject  are  inclined  to  think  that  the  intro- 
duction of  arbitration,  even  as  a  last  resort,  weakens  the  efficiency 
of  collective  bargaining.  It  is  almost  always  necessary  for  both 
sides  in  collective  bargaining  to  make  some  compromises  ;  and 
this  necessity  imposes  upon  the  representatives  of  the  trades  unions 
the  disagreeable  duty  of  reporting  to  their  constituents  that  they 
have  not  secured  the  exact  terms  which  they  were  instructed  in 
the  beginning  to  demand.  Because  of  this  fact,  if  a  provision  for 
arbitration  exists,  the  union  representatives  are  disposed  to  throw 
the  responsibility  of  disappointing  their  followers  upon  the  shoul- 
ders of  the  arbitrators. 

Moreover,  it  has  been  pointed  out  that  collective  bargaining  is 
essentially  inconsistent  with  arbitration.  Collective  bargaining  is 
commercial  and  elastic;  it  deals  with  the  formulation  of  future 
terms  of  employment;  it  looks  to  securing  the  best  results  possible; 
it  has  no  rational  foundation  save  the  willingness  of  the  parties 
concerned  to  get  the  most  possible  for  their  labor  or  their  money, 
as  the  case  may  be  ;  whereas  arbitration  is  judicial  in  essence,  and 
its  successful  application  implies  the  acceptance  of  some  estab- 
lished principle  of  wage  adjustment,  in  the  justice  of  which  both 
parties  acquiesce.  It  is  unfortunate  but  true  that  up  to  the  pres- 
ent time  no  one  has  ever  formulated  a  doctrine  of  wage  adjust- 
ment which  is  at  once  workable  and  acceptable  to  a  majority  of 
the  people.  Arbitration  is  a  perfectly  logical  device,  and  works 
successfully  in  the  interpretation  of  minor  difficulties  growing  out 
of  a  broad  agreement  which  has  already  been  accepted.  Or,  if 
both  sides  adopt  some  governing  principle,  it  is  perfectly  possible 
for  a  disinterested  arbitrator  to  decide  what  this  principle  demands 


404  OUTLINES   OF  ECONOMICS 

in  a  given  situation.  But  as  a  helpful  device  in  securing  the  ini- 
tial adoption  of  a  fundamental  agreement,  trade  arbitration  is  be- 
lieved to  be  illogical  in  principle  and  foredoomed  in  practice  to 
failure. 

Voluntary  Arbitration.  — There  are,  of  course,  many  other  kinds 
of  arbitration  which  have  proved  helpful  in  maintaining  the  in- 
dustrial peace.  Most  advanced  states  now  maintain  boards  of 
conciliation  and  arbitration,  whose  business  it  is  to  prevent  strikes 
if  possible,  and  to  adjust  or  settle  them  after  they  occur.  And 
the  Conciliation  Department  of  the  National  Civic  Federation  has 
also  to  its  credit  the  prevention  and  settlement  of  a  large  number 
of  important  strikes.  But,  for  the  most  part,  these  voluntary 
boards  of  conciliation  and  arbitration  have  shown  little  ability  to 
cope  with  the  real  situation.  They  have  achieved  enough  to  jus- 
tify their  existence,  but  not  enough  to  warrant  the  acceptance  of 
voluntary  arbitration  as  an  adequate  remedy  for  the  evil. 

Much  more  could  be  made  of  voluntary  conciliation  and  arbitration  than 
has  been  made  in  the  past.  The  short  but  very  promising  history  of  the 
Canadian  Industrial  Disputes  Investigation  Act  of  1907  suggests  that  a  law 
which,  like  the  Canadian  Act,  forbade  strikes  and  lockouts  in  important  in- 
dustries until  an  impartial  board  of  conciliators  had  had  time  to  investigate 
the  dispute  and  publish  their  recommendations  and  findings  concerning  the 
equities  of  the  case,  would  go  far  toward  delivering  us  from  the  more  injurious 
industrial  conflicts.  The  vital  provisions  of  such  a  method  of  conciliation 
are:  (i)  the  prohibition  of  strikes  and  lockouts  before  and  during  the 
investigation;  (2)  widespread  publication  of  the  findings  of  the  board  of  in- 
vestigation and  conciliation;  and  (3)  full  permission  to  strike  or  lock  out  after 
the  publication  of  the  findings.1 

Compulsory  Arbitration.  —  In  New  Zealand  an  even  more  radi- 
cal remedy  —  "  compulsory  arbitration  "  —  has  been  tried.  Seven 
workingmen  in  any  industry  may  organize  a  union  and  lodge  a 
demand  for  better  conditions  of  employment  before  arbitration 
boards,  whose  decisions,  when  ratified  by  the  supreme  or  central 
court  of  arbitration,  are  absolute  and  binding.  Similarly,  any  em- 
ployer whose  workmen  are  organized  in  a  union  may  take  a  case 
to  the  arbitration  tribunals  for  settlement.  An  award  of  the  cen- 

1  An  admirable  description  of  the  Canadian  Act,  from  the  pen  of  President 
Eliot,  may  be  found  in  McClwfs  Magazine  for  December,  1907. 


LABOR   PROBLEMS  405 

tral  court  of  arbitration  may  be  extended  by  the  court  to  all  com- 
petitors of  the  original  employer  in  the  colony.  In  this  way,  com- 
pulsory arbitration  brings  about  the  introduction  of  minimum 
wages  and  other  conditions  of  employment,  established  by  the  au- 
thority of  the  state  and  enforced,  not  only  by  the  watchful  eyes  oj 
the  parties  concerned,  but  by  the  factory  inspectors  themselves.  In 
Victoria  and  South  Australia  much  the  same  results  are  reached 
through  the  agency  of  wage  boards,  —  containing  representatives 
of  both  the  employers  and  their  employees  with  a  chairman  se- 
lected by  these  representatives  or  appointed  by  the  government,  — 
which  are  empowered  to  prescribe  minimum  wages  and  other 
conditions  of  employment,  that  are  enforced,  as  in  New  Zealand, 
by  the  factory  inspectors.  Strikes,  however,  are  not  prohibited 
under  this  system. 

It  is  impossible  to  enter  into  a  detailed  discussion  of  either  the 
New  Zealand  or  the  Victoria  system  at  this  place.  Both  systems 
have  been  in  operation  since  1896,  both  have  been  extended  to 
other  Australian  colonies,  and  both  have  been  partially  successful. 
But  the  probability  that  either  system  will  be  introduced  into  this 
country  is  so  small  as  to  make  their  discussion  unnecessary  here. 
Both  systems  would  conflict  with  our  constitutional  law,  and  both 
would  at  the  present  time  be  regarded  as  entirely  too  radical  by 
the  American  people.  Moreover,  a  large  majority  of  trades  union- 
ists in  this  country  are  strongly  opposed  to  compulsory  arbitra- 
tion. The  significance  of  the  New  Zealand  and  Australian  move- 
ment is  found  in  the  regulation  by  the  state  of  the  rate  of  wages. 

The  Ultimate  Solution.  —  In  arriving  at  a  decision  concerning 
the  measures  which  ought  to  be  taken  to  maintain  industrial  peace, 
it  should  be  remembered  that  strikes  are  much  more  destructive 
and  dangerous  in  some  industries  than  in  others,  and  that  here,  as 
in  most  other  economic  problems,  it  is  dangerous  to  proceed  on 
general  principles.  In  most  industries,  in  our  opinion,  the  strike 
question  may  safely  be  left  to  the  enlightened  self-interest  of  the 
parties  concerned,  trusting  to  collective  bargaining  and  the  work 
of  voluntary  arbitration  to  prevent  an  excessive  amount  of  war. 
In  small  competitive  industries  the  peaceful  strike  is  not  neces- 
sarily an  alarming  phenomenon. 


406  OUTLINES   OF  ECONOMICS 

Slowly  and  surely,  however,  the  opinion  is  gathering  force  that 
in  those  industries  which  vitally  touch  the  public  welfare  (such  as 
the  anthracite  coal  industry,  railway  transportation,  and  the  like) 
the  public  ought,  and  by  an  exercise  of  legal  ingenuity  might,  find 
means  to  preserve  the  peace  whether  the  two  parties  immediately 
concerned  desire  peace  or  not.  Compulsory  arbitration  in  com- 
petitive industries  would  unquestionably  be  unconstitutional  in 
this  country.  But  with  quasi-public  industries,  "  industries  af 
fected  by  a  public  interest,"  the  question  is  entirely  different.  If, 
because  of  their  monopolistic  character  and  their  intimate  connec- 
tion with  the  convenience  of  the  public,  the  legislature  may  regu- 
late the  service  and  the  rates  of  such  industries,  it  would  seem  to 
follow  even  more  clearly  that  the  legislature  may  adopt  any  meas- 
ure necessary  to  prevent  the  utter  cessation  of  such  industries  by 
strikes  and  lockouts.  If,  for  instance,  the  fare  charged  by  a 
street  railway  may  be  regulated  by  the  state,  in  order  to  prevent 
monopolistic  extortion,  how  much  more  justifiable  would  be  the 
action  of  the  state  in  preventing  the  complete  interruption  of  the 
traffic  of  the  railway  by  means  of  a  strike  or  lockout !  We  cannot 
pursue  this  topic  in  detail,  but  must  close  the  discussion  with  a 
simple  expression  of  belief  that  compulsory  arbitration  for  indus- 
tries affected  by  a  public  use  would  be  constitutional  and  prac- 
ticable. 

Profit  Sharing.  —  Profit  sharing  attempts,  not  to  provide  a 
remedy  for  industrial  disputes,  but  to  anticipate  and  prevent  them 
by  assigning  to  the  employees  a  share  of  the  profits  fixed  in  ad- 
vance. It  is  held  that  this  arrangement  enlists  the  employees'  inter- 
est in  the  success  of  the  business,  makes  them  more  economical, 
and  so  increases  their  zeal  and  efficiency  that  the  share  of  profits 
which  they  receive  does  not  reduce  in  the  long  run  the  earnings  of 
the  employer.  In  other  words,  the  employees  create  the  fund 
from  which  their  bonus  is  paid.  This  bonus  may  be  paid  in  many 
different  ways  :  either  in  cash  at  the  end  of  the  business  year,  or 
in  shares  of  stock  in  the  company  in  question,  thus  making  the 
workman  partial  owner  of  the  business;  or  it  may  be  amassed  in 
a  savings  or  insurance  fund,  from  which  in  his  old  age  the  work- 
man receives  a  pension,  or  his  family  an  annuity  or  cash  premium 


LABOR   PROBLEMS  407 

at  the  time  of  his  death.  The  last  method  of  profit  sharing  is 
usually  spoken  of  as  deferred  participation. 

Neither  historical  study  nor  theoretical  analysis  of  profit  shar- 
ing furnishes  reasonable  ground  for  the  belief  that  this  method  of 
industrial  remuneration  will  ever  play  an  important  part  in  solv- 
ing the  modern  labor  problem.  The  principle  of  profit  sharing 
was  recognized  by  the  French  economist  and  statesman,  Turgot, 
in  1775,  but  the  first  permanently  successful  experiment  in  profit 
sharing  was  begun  by  the  celebrated  French  firm  of  Leclaire  in 
1842.  By  1878,  120  cases  were  known  to  be  in  existence;  in  1891, 
about  300;  in  1900,  probably  no  more  were  in  existence  than  in 
1891,  although  one  authority  fixes  the  number  at  400.  In  the 
United  States,  at  the  present  time,  the  system  is  employed  in 
probably  no  more  than  twenty  establishments.  Since  1896,  more- 
over, and  particularly  in  England,  the  number  of  firms  which 
regularly  share  profits  with  their  employees  has  fallen  off ;  and  con- 
fidence in  the  system  as  a  method  of  solving  the  labor  problem  is 
unquestionably  diminishing. 

The  reasons  why  profit  sharing  has  not  proved  more  successful 
are  various.  In  the  first  place,  it  has  incurred  the  enmity  of  most 
labor  leaders,  who  oppose  it  because  it  has  often  been  introduced 
after  a  disastrous  strike  as  an  antidote  to  trades  unionism,  and  be- 
cause they  believe  that  it  stimulates  the  men  to  work  beyond  their 
strength,  and  eventually  results  —  as  overspeeding  always  re- 
sults —  in  reduced  wages. 

In  the  second  place,  it  is  illogical  and  inconsistent  as  explained 
by  most  of  its  advocates.  The  latter  assert  that  the  workmen 
create  the  fund  from  which  their  dividends  are  paid  by  increased 
care,  zeal,  and  speed.  If  this  be  true,  and  the  system  can  hardly 
prove  a  permanent  success  unless  it  is  true,  the  end  which  profit 
sharing  seeks  would  be  better  achieved  by  the  piece  rate  or  gain- 
sharing  methods  of  wage  payment.  By  both  of  these  methods 
the  worker  gets  his  premium  for  extra  zeal  and  efficiency  as  part 
of  his  wage,  not  as  a  gift;  gets  it  on  pay  day,  not  at  the  end  of  the 
year;  and  feels  as  free  to  bargain  and  higgle  about  the  size  of  the 
premium  as  he  does  about  the  size  of  the  wage.  Moreover,  his 
premium  cannot  be  dissipated  by  unwise  management  or  dishon- 


408  OUTLINES   OF   ECONOMICS 

esty  on  the  part  of  the  employer,  and  it  cannot  be  lost  by  reason 
of  his  death,  discharge,  or  change  of  employment. 

Profit  sharing  has  failed  because  it  is  unbusinesslike  and  smacks 
of  philanthropy.  The  average  employer  consciously  or  uncon- 
sciously expects  something  in  return  for  the  dividends  which  he 
distributes.  And  if  he  does  expect  a  return,  it  is  far  better  that 
he  should  pay  for  it  by  a  method  which  is  certain,  fixed  by  contract 
or  bargain  in  advance,  and  paid,  not  at  long  intervals,  during 
which  it  is  threatened  by  the  varying  fortunes  of  the  business, 
but  at  the  end  of  the  week  or  month  when  ordinary  wages 
are  paid.  Of  course,  if  in  addition  to  fair  wages  the  employer 
wishes  to  distribute  a  gratuitous  dividend  at  the  end  of  the  year, 
for  which  he  expects  nothing  in  return,  the  employee  is  not  likely 
to  object,  and  the  generosity  of  the  employer  will  probably  do  no 
harm.  But  such  a  system  of  profit  sharing  cannot  be  expected 
to  become  prevalent  throughout  a  competitive  commercial  system 
in  which  most  employers  cannot  be  philanthropists,  even  if  they 
desire.  Moreover,  human  nature  is  so  constituted  that  gifts  of 
this  kind  create  in  the  mind  of  the  giver  an  inevitable  expectation 
of  recompense. 

Industrial  Democracy.  —  The  industrial  organization  of  the 
past  was  despotic.  The  despotic  principle,  the  one-man  power, 
is  an  excellent  thing  in  its  own  time  and  place.  It  gives  to  indus- 
try the  elasticity,  celerity,  and  general  efficiency  which  come  from 
singleness  of  aim;  and  in  industry,  despotism  has  continued  longer 
than  in  the  political  sphere.  But  it  is  merely  a  phase  of  develop- 
ment and  ought  not  to  be  regarded  as  final.  Elsewhere  the  des- 
potic principle  has  been  softened  or  dissipated,  —  in  politics,  in 
religion,  in  the  family,  —  and  eventually  this  discordant  element 
is  bound  to  disappear  or  undergo  serious  modification  in  industry. 
The  whole  labor  movement  is  a  concerted  and  united  effort  to 
achieve  industrial  democracy,  which  means  self-rule,  self-control, 
the  self -direction  of  the  masses  in  their  efforts  to  gain  a  livelihood. 
It  is  primarily  because  profit  sharing  means  a  departure  from, 
and  not  an  approach  toward,  industrial  democracy  that  we  are 
forced  to  reject  it  as  a  progressive  step  in  accomplishing  those 
ends  which  the  labor  movement  is  inaugurated  to  achieve.  A 


LABOR  PROBLEMS  409 

far  more  consistent  method  of  securing  self-government  is  found 
in  cooperation. 

Cooperation  is  of  two  kinds,  coercive  and  voluntary.  Coer 
cive  cooperation,  which  implies  a  partial  or  complete  application 
of  socialism,  is  discussed  in  another  chapter. 

Voluntary  cooperation  takes  many  different  forms,  among 
which  we  may  distinguish:  (i)  distributive  or  consumers'  coop- 
eration, sometimes  spoken  of  as  cooperative  buying;  (2)  coopera- 
tive borrowing  or  cooperative  credit;  (3)  cooperative  marketing; 
and  (4)  producers'  or  pure  cooperation. 

Consumers'  or  distributive  cooperation  has  no  necessary  con- 
nection with  the  transportation  of  goods,  but  refers  merely  to  a 
method  of  retail  or  wholesale  exchange.  Purchasers  of  groceries, 
dry  goods,  and  the  like  come  together  to  purchase  what  they 
need,  and  thus  eliminate  profits.  They  form  a  stock  company, 
subscribe  for  shares,  employ  a  manager  and  clerks,  —  who  often 
do  not  even  share  in  the  profits,  —  and  start  a  business.  Divi- 
dends are  sometimes  paid  only  on  shares,  but  the  approved  way 
is  to  pay  a  moderate  interest  on  capital  and  to  divide  profits 
among  the  customers  in  proportion  to  their  purchases,  the  division 
being  made  at  the  end  of  stated  intervals.  Usually  a  larger  divi- 
dend is  distributed  to  shareholders  than  to  ordinary  customers; 
and  in  some  cases  the  employees  receive  as  large  a  bonus  as  the 
shareholders.  Profits  are  thus  said  to  be  divided  among  capital, 
custom,  and  labor.  But  so  far  as  labor  is  concerned,  the  most 
that  can  be  said  is  that  it  receives  a  small  share  of  the  earnings; 
labor  does  not  cooperate  in  the  sense  that  it  has  an  important 
voice  in  the  management  of  the  business.  The  scheme  is  one 
of  distributive  cooperation  plus  profit  sharing,  not  one  of  pure 
cooperation. 

Cooperative  credit  and  cooperative  marketing  are  familiar 
phenomena  in  the  United  States  —  the  first  in  the  form  of  the 
well-known  building  and  loan  association;  the  second  in  the  form 
of  fruit  growers'  association,  cooperative  elevator  companies,  and 
the  like,  formed  for  the  purpose  of  securing  better  terms  and  facili- 
ties from  railroads,  commission  houses,  and  middlemen  in  general. 
In  1902-1903,  for  instance,  there  were  5299  building  and  loan 


410  OUTLINES   OF   ECONOMICS 

associations  in  the  United  States,  with  a  membership  of  1,530,707, 
and  total  assets  of  $577,228,014.  About  the  same  time  (1902) 
there  were  also  994  cooperative  telephone  companies,  operating 
89,300  instruments. 

The  good  which  these  cooperative  associations  have  accom- 
plished is  enormous,  and  there  can  be  no  doubt  of  their  practi- 
cability. They  have  not  only  proved  commercially  profitable  to 
the  participators,  but  they  have  trained  them  to  "team  work" 
and  inculcated  the  spirit  of  mutual  concession,  the  give  and  take 
of  concerted  endeavor,  which  makes  for  social  solidarity  and  con- 
stitutes such  an  indispensable  element  of  good  citizenship  in  a 
democratic  state. 

But  they  have  done  little  and  promised  to  do  little  in  solving 
the  labor  problem  or  in  essentially  improving  the  distribution  of 
wealth.  They  are,  for  the  most  part,  composed  of  small  capi- 
talists, farmers,  or  salaried  men,  —  not  wage  earners,  —  and  in 
organization  differ  little  from  democratically  managed  stock 
companies  of  the  usual  type.  Many,  if  not  most,  of  the  market- 
ing associations  are  profit-making  concerns  whose  employees 
have  no  more  voice  in  the  selection  of  their  bosses,  and  no  more 
share  in  the  management  of  the  business,  than  the  employees  of 
an  ordinary  corporation.  Even  in  the  British  cooperative  socie- 
ties the  employees  have  no  share  in  the  management,  and  though 
some  of  the  associations  —  notably  the  Scottish  Wholesale  So- 
ciety —  indulge  in  a  mild  species  of  profit  sharing  with  their 
employees,  the  result  is  not  industrial  democracy,  not  self-govern- 
ment, but  merely  joint-buying  plus  a  paternalistic  scheme  of  profit 
sharing.  The  limits  of  the  success  of  the  British  cooperative 
movement  are  suggested  by  the  fact  that  the  employees  of  the 
cooperative  societies  have  formed  themselves  into  a  trades  union 
for  the  betterment  of  their  condition  of  employment. 

While  consumers'  cooperation  and  cooperative  marketing  — 
both  designed  to  abolish  the  profits  of  the  middleman  —  are 
important  and  praiseworthy  forms  of  economic  association,  they 
have  little  effect  upon  the  wage-earning  classes,  and  offer  no 
remedy  for  the  antagonism  between  capital  and  labor  in  manu- 
facturing industries.  The  variety  of  cooperation  which  really 


LABOR  PROBLEMS  411 

copes  with  these  questions  and  seriously  attempts  to  regenerate 
the  wage  system  is  producers'  cooperation.  The  essential  fea- 
tures of  this  form  of  cooperation  are  (i)  that  each  group  of  workers 
is  to  be  associated  by  their  own  free  choice;  (2)  that  these  asso- 
ciates shall  work  under  a  leader  elected  and  removable  by  them- 
selves ;  and  (3)  that  the  collective  remuneration  of  the  labor  per- 
formed by  the  group  shall  be  divided  among  all  its  members 
(including  the  leader)  in  such  a  manner  as  shall  be  arranged, 
upon  principles  recognized  as  equitable  by  the  society  them- 
selves.1 

Successful  cooperative  experiments  fulfilling  the  above  con- 
ditions are  seldom  met  with.  They  are  not  unknown.  Here  and 
there  a  man  of  transcendent  commercial  genius  and  extraordi- 
nary sympathy  has  succeeded  in  democratizing  his  business, 
turning  it  over  to  his  employees  and  so  impressing  his  spirit  and 
his  methods  upon  his  successors  that  the  business  continues  to 
prosper  under  the  regime  of  self-government.  An  illustration 
is  found  in  the  Godin  Famttistere  of  Guise,  France,  which,  begin- 
ning with  a  scheme  of  profit  sharing  in  1877,  has  finally  resulted 
in  the  establishment  not  only  of  a  cooperative  manufacturing 
enterprise,  but  in  the  successful  conduct  of  what  practically 
amounts  to  a  cooperative  community. 

But  such  cases  are  rare.  Most  experiments  in  producers'  co- 
operation have  failed,  and  we  fear  they  must  continue  to  fail. 
They  simply  cannot  meet  the  competition  of  businesses  organized 
in  the  ordinary  way,  directed  by  one  man  or  set  of  men  with  all 
the  efficiency,  mobility,  and  adaptability  that  come  from  single- 
ness of  aim  and  undivided  management.  Industrial  democracy, 
as  achieved  in  the  cooperative  form  of  industrial  organization,  is 
too  unwieldy,  too  slow,  too  mechanical.  Multitudinous  manage- 
ment means  relatively  uncertain,  indecisive,  and  inefficient  man- 
agement. 

A  modified  form  of  producers'  cooperation  is  not  unknown  among  the 
manufacturing  industries  of  this  country.  An  approximate  idea  of  the  extent 
of  this  form  of  industrial  organization  may  be  gathered  from  recent  census 
statistics.  In  1905  the  statistics  of  manufactures  relating  to  form  of  busi- 

1  Schloss,  Methods  of  Industrial  Remuneration,  p.  228. 


4I2  OUTLINES   OF  ECONOMICS 

ness  organization  show  a  separate  class  of  "  miscellaneous  business  organiza- 
tions" which  we  are  told  consists  almost  entirely  of  cooperative  manufactur- 
ing concerns.  There  were  in  this  group  3203  establishments  (constitut- 
ing 1.5  per  cent  of  all  manufacturing  establishments)  with  a  capital  of 
$20,729,744  (0.2  per  cent  of  the  aggregate  capital),  employing  8520  persons 
(0.2  per  cent  of  all  wage  earners),  producing  goods  with  an  annual  value  of 
$54,466,028  (0.4  per  cent  of  the  aggregate  product).  Most  of  these  associa- 
tions are  cooperative  creameries ;  and  it  is  interesting  to  note  that  in  this  great 
industry  —  which  was  cooperative  in  origin  —  the  proportion  of  cooperative 
concerns  is  steadily  diminishing.  These  figures  furnish  a  maximum  estimate 
of  producers'  cooperation  in  the  United  States,  and  a  large  majority  of  the 
concerns  credited  to  cooperation  in  this  enumeration  would  fail  to  satisfy 
a  strict  definition  of  producers'  cooperation.  For  the  most  part  they  rep- 
resent a  form  of  cooperation  among  farmers  and  small  capitalists  who 
stand  on  an  equality  as  among  themselves,  but  give  their  employees  no  real 
share  in  the  management  of  the  business. 

The  wage  system,  whatever  its  defects,  has  one  striking  virtue 
—  certainty.  The  wage  earner  knows  what  to  expect  and  gets 
what  he  expects.  He  is  insured  against  risk  of  loss,  and  although 
he  may  pay  too  high  a  price  for  his  insurance,  the  insurance  itself 
is  a  highly  desirable  thing.  It  is  one  of  the  weaknesses  of  pro- 
ducers' cooperation  that  the  workman  is  encouraged  to  invest 
his  savings  in  the  hazardous  competitive  experiments  in  which 
he  is  engaged.  He  becomes  part  owner  of  the  enterprise,  to  be 
sure,  but  by  doing  so  he  assumes  the  risk  of  failure,  a  risk  which, 
other  things  being  equal,  it  is  desirable  to  eliminate.  It  is  probable 
that  the  ultimate  method  by  which  industrial  democracy  is  achieved 
will  retain  that  feature  of  the  present  wage  system  by  which  most 
of  the  workers  are  insured  against  business  losses. 

Indeed,  we  expect  to  see  industrial  democracy  achieved  through 
the  labor  organization.  Since  the  formation  of  the  trades  union 
and  the  introduction  of  collective  bargaining,  the  range  of  this 
bargaining  has  constantly  widened.  Beginning  with  questions  of 
wages,  hours  of  labor,  and  apprenticeship,  it  has  gradually  spread, 
until  at  the  present  time  some  unions  bargain  about  the  sanitary 
conditions  of  the  work,  the  introduction  of  safety  devices,  the  em- 
ployment of  women,  the  use  of  machinery,  and  the  status  of  the 
men  with  whom  their  members  work.  A  very  few  powerful 
unions  insist  that  the  foreman  under  whom  their  members  work 


LABOR  PROBLEMS  413 

shall  belong  to  the  union,  demand  a  voice  in  the  discharge  of  em- 
ployees, and  try  to  force  the  employer,  when  taking  on  new  men, 
to  select  them  in  order  from  lists  of  unemployed  journeymen 
prepared  by  the  union.  These  demands,  of  course,  may  be  harm- 
ful; the  working  classes  will  have  to  learn  by  experience  what 
measure  of  control  it  is  best  to  have  in  the  hands  of  the  employer. 
The  fact  that  power  may  be  abused,  however,  is  really  beside  the 
point.  The  point  lies  in  the  possibility,  and  in  general  the  desira- 
bility, of  extending  the  range  of  collective  bargaining  until  the 
employees  shall  have  a  voice  —  and  it  is  to  be  hoped  a  prevailing 
voice  —  in  determining  all  the  conditions  of  employment.  Through 
collective  bargaining  the  control  of  the  employees  over  the  busi- 
ness may  be  indefinitely  expanded.  Once  having  secured  control, 
the  majority  will  learn,  as  they  have  in  political  life,  to  leave  certain 
particularly  delicate  questions  to  their  industrial  captains.  In 
the  past,  labor  has  had  to  seek  capital  and  serve  it.  In  the  future, 
capital  may  have  to  seek  arid  serve  labor.  The  past  may  be 
pictured  by  the  single  entrepreneur  with  his  capital  hiring  a  thou- 
sand men  to  do  his  bidding.  The  future  may  behold  the  thou- 
sand hiring  the  entrepreneur  and  his  capital  to  do  their  bidding. 
And  the  latter  is  the  more  pleasing,  the  more  democratic,  and 
altogether  the  more  wholesome  picture. 

These  words  are  written  in  no  spirit  of  advocacy,  and  with  no 
intention  of  palliating  the  obvious  shortcomings  of  the  trades 
union.  But  the  fact  remains  —  whether  we  like  it  or  not  —  that 
economic  theory  and  economic  history  unite  in  the  conclusion 
that  the  union  has  come  to  stay  as  long  as  the  system  of  capi- 
talistic production.  The  union  must  be  improved,  it  cannot  be 
extirpated;  and  the  most  urgent  task  of  the  present  is  to  con- 
vince employers  and  unionists  that  there  will  be  no  real  peace 
until  employers  acknowledge  the  inevitableness  of  the  union, 
and  unions  acknowledge  —  sympathetically  and  in  practical 
ways  —  the  social  serviceableness  of  the  employer.  Trades  unions 
have  been  guilty  of  many  sins  —  violence,  monopoly,  political 
corruption.  But  their  gravest  danger  at  the  present  time  is  a 
false  philosophy,  in  accordance  with  which  many  unionists  have 
come  to  believe  that  the  best  way  to  help  the  union  is  to  oppose 


414  OUTLINES   OF  ECONOMICS 

the  employer.  This  is  not  true  of  the  more  wisely  conducted 
unions.  The  railway  brotherhoods  frequently  unite  with  the  rail- 
way managers  in  securing  legislation  favorable  to  the  railway 
industry;  and  the  history  of  the  National  Civic  Federation,  for 
example,  proves  that  a  number  of  the  opposing  leaders  are  keenly 
aware  that  capital  and  labor  have  interests  in  common  as  well 
as  in  opposition.  In  some  way,  however,  united  labor  as  a  whole 
has  got  to  learn  this  lesson  —  how  to  drive  just  as  favorable  a 
bargain  as  possible  with  the  employers  in  the  first  instance,  and 
then,  the  bargain  having  been  made,  to  bend  every  effort  in  loyal 
cooperation  with  the  employer  to  make  the  business  the  greatest 
possible  success.  This  is  not  mere  platitude.  In  the  long  run, 
and  whether  we  like  the  fact  or  not,  productive  efficiency  is  the 
supreme  economic  virtue;  and  the  institution  that  stands  in  its 
way  will  perish.  The  trades  union  must  bring  into  industry 
something  besides  conflict,  or  it  will  disappear.  The  union  that 
so  conducts  itself  as  to  make  the  non-union  man  or  the  non-union 
shop  more  efficient  than  the  union  man  or  the  union  shop,  in  the 
long  run,  simply  puts  a  premium  upon  the  suppression  of  union- 
ism. 

QUESTIONS 

1.  Is  the  industrial  or  the  trades  union  the  more  logical  form  of  organiza- 
tion ?     Can  the  two  be  reconciled  ?     Mention  as  many  kinds  of  jurisdiction 
disputes  as  you  can. 

2.  Does  the  trades  union  rest  upon  a  sound  economic  basis?     Is  it  likely 
to  endure?     Is  it  in  any  large  degree  responsible  for  the  conflict  between 
labor  and  capital? 

3.  Are  all  attempts  to  achieve  a  monopoly  illegitimate?     Is  there  more 
justification  for  labor  monopolies  than  industrial  monopolies  ? 

4.  Is  the  policy  of  the  closed  shop  ever  justifiable  ?     Intimidation  of  non- 
union men  ?  restriction  of  apprenticeship  ?  regulation  of  output  ? 

5.  The  strike  has  been  defined  as  a  "  concerted  cessation  of  work  " ;   is 
this  definition  correct?     Have  men  a  "right"  to  strike  whenever  they  wish? 
Are  employers  justified  in  "locking  out"  their  men  at  pleasure? 

6.  Are  "organized"  strikes  more  successful  than  "unorganized"  strikes? 
Are  strikes  more  or  less  successful  than  formerly  ?     Do  they  last  longer  ? 

7.  Is  the  "blacklist"  more  justifiable  than  the  boycott?     Can  either  the 
"  blacklist "  or  the  boycott  be  conducted  in  a  lawful  manner  ? 

8.  Distinguish  between  trade  arbitration,  voluntary  arbitration,   "com- 


LABOR   PROBLEMS  415 

pulsory  investigation,"  and  compulsory  arbitration.     What  are  the  defects 
of  arbitration  as  a  method  of  settling  labor  disputes? 

9.  Why  do  labor  leaders  oppose  compulsory  arbitration?     Is  their  op- 
position a  sufficient  reason  for  rejecting  it  ?     Why  is  the  plea  for  compulsory 
arbitration  particularly  strong  in  the  case  of  monopolistic  industries  ? 

10.  How  does  "gain  sharing"  differ  from  "profit  sharing"?     Is  profit 
sharing  necessarily  paternalistic  ?     If  so,  is  this  a  defect  ? 

11.  Does  consumers'   cooperation  materially  advance  industrial  democ- 
racy ?     Is  producers'  cooperation  likely  to  grow  and  expand  ? 

12.  How  can  a  large  measure  of  industrial  control  be  secured  for  the  wage 
earner  through  the  trades  union  ?     Other  things  being  equal,  is  it  desirable 
that  the  wage  earner  should  secure  a  large  measure  of  control  ?     Is  it  per- 
missible to  assume  that  other  things  will  be  "equal"? 

LITERATURE 

ADAMS,  T.  S.,  and  SUMNER,  H.  L.     Labor  Problems. 

BOOTH,  CHARLES.     Life  and  Labor  of  the  People  in  London. 

BROOKS,  JOHN  GRAHAM.     The  Social  Unrest. 

Bureau   of   Labor   (U.S.).      Bulletin   Annual   and   Special  Reports  of  the 

Commission  of  Labor. 

COMMONS,  JOHN  R.     Trade  Unionism  and  Labor  Problems. 
ELY,  RICHARD  T.     The  Labor  Movement  in  America. 
OILMAN,  N.  P.     Methods  of  Industrial  Peace;  A  Dividend  to  Labor. 
HALL,  P.  F.     Immigration. 

Industrial  Commission  (U.S.).     Report,  Vols.,  XVII  and  XIX. 
LEVASSEUR,  E.     The  American  Workman. 
MITCHELL,  JOHN.     Organized  Labor. 

ROWNTREE,  B.  SEEBOHM.     Poverty:  A  Study  of  Town  Life. 
SCHLOSS,  D.  F.     Methods  of  Industrial  Remuneration. 
WEBB,  CATHERINE.     Industrial  Cooperation. 
WEBB,  BEATRICE  and  SIDNEY.    History  of  Trade  Unionism;   Industrial 

Democracy. 


CHAPTER    XXIV 
INTEREST 

INTEREST  is  the  price  paid  for  the  services  of  capital.  It  appears 
in  two  forms:  loan  interest,  the  amount  paid  by  one  man  to  another 
for  the  use  of  money  or  goods  owned  by  the  latter,  and  imputed 
interest,  that  portion  of  the  value  of  the  products  of  industry  which 
is  attributed  or  imputed  to  the  services  of  capital,  as  distinct  from 
the  services  of  land  and  labor.  Interest  is  usually  measured  as  a 
percentage  of  the  money  value  of  capital,  and  this,  coupled  with 
the  fact  that  capital  is  often  lent  in  the  form  of  money,  has  led  to 
the  prevalence  of  the  idea  that  interest  is  a  payment  for  the  use  of 
money.  This  is  only  a  partial  description  of  interest,  however, 
for  it  does  not  include  imputed  interest  nor  the  loan  interest  paid 
for  the  use  of  many  forms  of  capital  —  buildings,  for  example. 

Objections  to  Interest  Taking.  —  It  is  only  in  modern  times  that  interest 
has  been  generally  considered  a  legitimate  and  necessary  form  of  income. 
The  strong  denunciations  of  usury  contained  in  both  the  Old  and  New  Testa- 
ments are  denunciations  of  interest  taking,  for  the  word  "usury"  formerly 
meant  any  kind  of  interest,  and  not  merely  excessive  interest,  as  at  present. 
The  opinion  of  many  classical  writers  is  illustrated  by  Aristotle's  dictum  that 
"  money  was  intended  to  be  used  in  exchange,  but  not  to  increase  at  interest." 
During  the  greater  part  of  the  middle  ages  the  authority  and  teaching  of  the 
church  was  set  definitely  against  the  taking  of  interest  in  any  form.  In  the 
middle  of  the  fourteenth  century  the  prohibition  of  usury  was  incorporated 
in  the  civil  law.  These  objections,  however,  had  reference  chiefly  to  loan 
interest,  and  interest  on  money  lent  for  personal  use  at  that ;  for  capital  was 
not  thought  of  as  one  of  the  factors  in  production  until  comparatively  modern 
times.  In  fact,  by  the  fifteenth  century,  when  opportunities  for  the  profitable 
use  of  money  had  appeared  in  such  forms  as  the  purchase  of  rights  to  receive 
land  rents,  or  partnership  ventures  in  trade  (where  interest  was  held  to  be 
justified  by  the  risk  incurred),  the  canonists  (the  writers  on  church  law) 
admitted  the  legitimacy  not  only  of  such  gainful  employments  of  money, 

416 


INTEREST  417 

but  also,  in  many  cases,  of  interest  on  loans.  The  justification  of  loan  inter- 
est took  on  at  first  many  curious  forms.  It  was  regarded  in  some  cases  as 
a  fine  for  delay  in  the  repayment  of  the  loan,  so  that  lenders  often  resorted 
to  the  subterfuge  of  lending  money  gratuitously  for  a  nominal  period,  the 
real  agreement  being  that  they  were  to  get  back  their  money  principal,  with 
a  fine  for  the  delay  added,  at  a  later  date.  In  other  cases  loan  interest  was 
justified  as  a  payment  for  the  loss  of  the  possible  gains  which  the  lender 
might  have  got  by  using  his  money  himself.  Usury,  which  at  first  meant  any 
kind  of  loan  interest,  came  to  mean  interest  on  money  loans  to  relieve  per- 
sonal needs,  rather  than  for  gainful  employment,  then  interest  on  loans  in 
which  the  element  of  risk  was  lacking,  and  finally,  excessively  high  interest. 
To-day  the  use  of  capital  is  so  prominent  a  feature  of  our  productive  meth- 
ods that  the  legitimacy  of  interest  is  not  generally  questioned.  Socialistic 
writers,  however,  insist  that  interest  is  only  a  result  of  the  system  of  the  private 
ownership  of  capital,  and  that  with  the  abolition  of  private  property  in  pro- 
duction goods  what  is  now  counted  as  interest  would  become  part  of  the  wages 
of  labor.  It  is  accordingly  important  that  we  should  understand  clearly 
why  interest  has  to  be  paid,  as  well  as  that  we  should  study  the  factors  de- 
termining the  rate  of  interest.  We  shall  find,  however,  that  the  explanation 
of  the  necessity  of  interest  is  really  a  part  of  the  explanation  of  the  rate  of 
interest. 

Inadequate  Explanations  of  Interest.  —  An  idea  that  naturally 
suggests  itself  is  that  interest  has  to  be  paid  for  the  use  of  money 
because  "money  can  be  profitably  employed  in  business."  This 
explanation,  which  is  very  much  like  one  of  the  ways  in  which  the 
canonists  finally  came  to  justify  interest,  is  obviously  inadequate. 
It  is  only  an  attempt  to  explain  loan  interest  by  assuming  the  exist- 
ence of  imputed  interest.  What  we  want  to  know  is  why  "  money 
can  be  profitably  employed  in  business." 

A  similar,  but  somewhat  more  definite,  attempt  at  an  explanation 
is  contained  in  the  statement  that  interest  is  paid  because  capital 
is  productive.  It  is  pointed  out  that  by  the  use  of  capital  goods 
the  product  of  industry  is  greatly  increased  over  what  could  be 
produced  by  labor  and  land  alone.  This  is,  of  course,  true,  but 
taken  alone  it  does  not  explain  interest.  The  problem  of  interest 
relates  to  the  value  of  the  product,  not  to  the  amount  of  the  product. 
There  is  nothing  in  the  mere  quantity  of  the  product  that  gives 
value  to  it.  The  farmers  of  this  country  have  found  more  than 
once  that  a  large  wheat  crop  has  sold  for  less  .in  the  aggregate 
than  a  small  one.  The  real  problem  of  interest  is  this:  Why 

2E 


418  OUTLINES   OF  ECONOMICS 

can  an  entrepreneur,  by  the  use  of  capital,  increase  the  selling 
value  of  his  product  enough  to  not  only  pay  for  the  capital  actually 
used  up  in  production,  but  also  to  pay  in  addition  a  surplus  in  the 
form  of  interest  upon  the  capital  employed?  Nor  can  we  say 
that  "  capital  produces  interest."  It  cannot  be  too  strongly  em- 
phasized that  neither  land,  nor  labor,  nor  capital  produces  value. 
They  are  simply  the  instruments  used  in  the  production  of  things 
that  are  valuable  because  they  satisfy  human  wants,  and  hence 
command  a  price  in  the  market.  Part  of  the  value  of  the  product 
is  imputed  or  attributed  to  capital  in  the  form  of  interest,  and  it  is 
because  of  its  capacity  to  earn  interest  that  capital  is  valued.  To 
say  that  capital  produces  value  is  to  reverse  the  true  process. 
Capital  goods  produce  (or  aid  in  the  production  of)  other  goods, 
and  the  value  of  these  produced  goods  is  the  cause  of  capital 
value. 

Why  Interest  can  be  Paid.  — We  shall  find  the  analysis  of  our 
problem  somewhat  simpler  if  we  divide  it  into  two  parts:  first, 
why  interest  is  possible;  and  second,  why  interest  must  be  paid. 
In  discussing  why  interest  can  be  paid,  we  shall  assume  that  in- 
terest must  be  paid  if  capital  is  to  be  used  in  production,  reserving 
the  discussion  of  the  legitimacy  of  this  assumption  for  the  follow- 
ing section. 

It  is  the  physical  productivity  of  capital  —  the  fact  that  capital 
can  be  used  in  cooperation  with  land  and  labor  in  the  production 
of  goods —  that  makes  it  possible  for  the  entrepreneur  to  look  upon 
part  of  his  total  money  income  as  interest  on  his  investment  of 
capital.  Now,  as  we  have  seen,  the  mere  fact  that  capital  is  pro- 
ductive in  the  physical  sense  does  not  explain  interest,  but  the  fact 
that  capital  is  used  under  the  guidance  of  entrepreneurs  in  the  pro- 
duction of  wealth  does  explain  the  possibility  of  interest.  The 
mere  physical  productivity  of  land  does  not  explain  rent  —  land 
will  grow  weeds  as  well  as  wheat;  nor  does  the  mere  physical 
productivity  of  labor  explain  wages  —  some  men  have  put  years 
into  the  construction  of  perpetual-motion  machines  that  are  abso- 
lutely worthless.  But  it  is  the  business  of  the  entrepreneur  to  see 
that  land  and  labor  are  used  wisely;  and  from  his  point  of  view 
they  are  used  wisely  if  they  are  used  in  the  production  of  things 


INTEREST  419 

that  consumers  want,  and  want  intensely  enough  to  pay  such  prices 
as  will  enable  the  entrepreneur  to  pay  the  rent  of  the  land  and  the 
wages  of  the  labor  employed.  Similarly,  an  entrepreneur  will 
not  employ  capital  in  any  kind  of  production  unless  the  prices  he 
expects  to  get  for  his  products  are  such  as  to  cover  the  expenses 
incurred  in  the  use  of  capital.  Nor  will  he  knowingly  use  so  much 
capital  that  his  product  will  sell  for  less  than  a  smaller  product 
would  have  sold  for,  any  more  than  he  will  knowingly  produce  an 
unprofitably  large  quantity  of  goods  by  the  use  of  too  much  labor 
or  too  much  land. 

On  the  one  hand,  the  entrepreneur  has  to  estimate  the  prices  he 
will  get  for  his  products;  on  the  other  hand,  he  has  to  estimate  the 
productivity  and  the  expense  of  land,  labor,  and  capital.  The 
expense  of  capital  includes,  first,  the  cost  of  the  capital  actually 
used  up  in  production;  and  second,  interest  on  all  of  the  capital 
used,  whether  "  used  up  "  or  not  (assuming,  as  previously  ex- 
plained, the  necessity  of  interest).  The  principles  that  will  guide 
the  entrepreneur  as  to  the  relative  proportions  of  labor,  land,  and 
capital  he  will  use  have  already  been  discussed  in  connection  with 
the  general  subject  of  diminishing  productivity.  We  may,  how- 
ever, emphasize  again  the  fact  that  productivity  must  be  attributed, 
not  to  "  capital  in  general,"  but  to  specific  units  of  specific  kinds 
of  capital,  used  in  connection  with  a  definite  amount  of  land  and 
labor;  the  productivity  imputed  to  any  particular  unit  of  capital 
being  the  precise  amount  of  product  actually  dependent  upon  the 
use  of  that  particular  unit  —  the  amount  by  which  the  total  prod- 
uct would  be  decreased  if  the  unit  in  question  were  not  used.  An 
entrepreneur  will  increase  his  use  of  capital  rather  than  of  labor 
or  land,  when  a  given  expense  for  any  kind  of  capital  will  add  more 
to  his  product  than  would  a  similar  expense  for  labor  or  land. 

The  Necessity  of  Interest.  —  Free  goods,  such  as  air  or  the  force 
of  gravitation,  are  productive  in  the  physical  sense,  in  that  they  are 
absolutely  necessary  to  most  forms  of  production.  The  surface 
of  Lake  Michigan  is  used  in  producing  the  service  of  transporta- 
tion in  essentially  the  same  way  as  is  capital  in  the  form  of  a  rail- 
way roadbed  and  track.  But  we  cannot  impute  productivity  to 
specific  units  of  free  goods,  for  the  simple  reason  that  the  amount 


420  OUTLINES    OF   ECONOMICS 

of  the  product  is  not  dependent  on  the  utilization  of  any  one  unit 
of  them.  Any  one  cubic  foot  of  air  could  be  dispensed  with;  we 
cannot  even  conceive  of  the  force  of  gravitation  as  limited  in  quan- 
tity; the  great  lakes  furnish  pathways  that  are  more  than  sufficient 
for  all  the  vessels  that  traverse  them.  We  do  impute  productivity 
to  the  better  lands  that  are  used  in  production,  because  any  one 
acre  of  them  could  not  be  withdrawn  from  use  without  a  diminu- 
tion in  the  product.  The  controlling  reason  for  this  difference  Is 
that  the  spontaneous  supply  of  free  goods  is  in  excess  of  the  use 
that  is  made  of  them;  while  the  supply  of  the  better  lands  is  lim- 
ited as  compared  with  the  demand  for  them.  This  suggests  at 
once  why  productivity  has  to  be  imputed  to  specific  units  of  capi- 
tal, and  that  is,  that  the  supply  of  capital  is  limited. 

Why  is  the  supply  of  capital  limited  ?  This  question  leads  us  to 
examine  the  nature  of  the  supply  of  capital.  Imagine  a  society 
without  capital  carrying  on  its  productive  processes  by  the  use  of 
labor  and  land  only.  So  long  as  the  members  of  this  community 
produce  only  what  they  consume  directly,  or  (if,  despite  the  ab- 
sence of  capital,  money  economy  and  a  system  of  exchange  may 
be  imagined  to  prevail)  so  long  as  they  spend  all  their  money  in- 
comes for  things  used  up  immediately  in  the  satisfaction  of  their 
wants,  there  will  be  no  accumulation  of  capital.  In  order  that 
capital  shall  be  furnished,  it  is  necessary  that  some  members  of  the 
community  turn  aside  from  the  production  of  things  that  are  used 
in  the  immediate  satisfaction  of  their  wants  and  devote  their  time 
to  the  production  of  goods  that  will  be  used  in  further  production. 
Whether  they  do  this  on  their  own  account,  or  whether  they  are 
paid  for  their  work  while  they  are  doing  it  by  others,  some  post- 
ponement of  the  satisfaction  of  wants  is  necessary.  In  the  one 
case  those  who  produce  the  capital  goods  give  up  temporarily  the 
satisfactions  which  they  might  have  derived  from  the  consump- 
tion goods  they  could  have  produced.  In  the  other  case,  those 
who  are  devoting  part  of  their  money  incomes  to  the  payment  of 
those  who  are  producing  capital  goods  are  giving  up  the  immediate 
satisfactions  which  they  might  have  secured  with  the  money.  In 
either  case  the  production  of  capital  involves  the  sacrifice  of  wait- 
ing on  the  part  of  some  members  of  the  community.  But  why 


INTEREST  421 

should  waiting  be  called  a  sacrifice?  Do  not  those  who  give  up 
present  satisfactions  in  order  that  capital  goods  may  be  produced 
get  a  full  repayment  if  they  get  back  in  the  form  of  the  products 
of  their  capital  goods  as  much  as  they,  for  the  time  being,  give  up? 
In  other  words,  why  should  capital  not  be  furnished  for  produc- 
tive purposes  if  those  who  furnish  the  capital  get  back  an  exact 
equivalent  (in  value)  for  the  amount  of  capital  they  have  supplied  ? 
Why  should  an  extra  payment,  in  the  form  of  interest,  be  necessary 
to  induce  saving? 

The  answer  to  these  questions  is  found  in  the  difference  between 
present  and  future  values.  Our  present  wants  are  more  intense 
than  our  present  estimates  of  our  future  wants  of  a  similar  kind. 
We  visualize  the  present  more  vividly  than  we  do  the  future;  we 
yield  sometimes  to  the  temptation  of  satisfying  the  more  trivial 
wants  of  the  present,  even  when  we  know  that  we  are  thereby  ren- 
dering uncertain  the  satisfaction  of  more  important  wants  in  the 
future;  and  when  we  take  considerable  periods  of  time  into  ac- 
count, we  may  reasonably  say  that  the  uncertainty  of  life  itself 
gives  us  some  ground  for  preferring  present  to  possible  future 
satisfactions.  Notwithstanding  the  vast  difference  between  civ- 
ilized men  and  savages  in  this  respect,  —  for  many  of  the  latter 
seem  to  have  absolutely  no  regard  for  future  needs,  —  the  fact  still 
remains  that  waiting  is  a  sacrifice,  and  in  order  to  induce  the  sav- 
ing that  is  a  prerequisite  to  the  use  of  capital  in  industry,  a  pre- 
mium or  reward  for  waiting  has  to  be  paid  in  the  form  of  interest. 
This  fact  is  the  most  fundamental  thing  in  the  explanation  of 
interest. 

It  must  not  be  inferred  that,  in  the  actual  economic  life  of  to-day, 
no  capital  would  be  supplied  if  interest  were  not  paid.  There  are 
other  motives  that  induce  men  to  save  parts  of  their  incomes. 
The  desire  to  provide  for  old  age  and  for  such  contingencies  as 
sickness  and  accident,  or  to  make  provision  for  one's  family  in 
case  of  death,  would  result  in  a  considerable  amount  of  saving. 
The  mere  pride  of  accumulation,  and  the  fact  that  the  satisfaction 
of  many  important  wants,  such  as  the  desire  to  own  a  house,  or  the 
desire  for  foreign  travel,  necessitate  the  gradual  accumulation  of 
what  is  to  most  persons  a  considerable  sum  of  money,  must  also 


422  OUTLINES   OF  ECONOMICS 

be  given  due  weight.  None  of  these  motives  would  in  themselves 
induce  men  to  invest  or  lend  their  saved  funds  in  productive  under- 
takings if  no  interest  at  all  were  paid.  In  fact,  this  would  be  a 
matter  of  indifference,  for  savings  might  just  as  well  be  hoarded. 
But  a  very  low  interest  premium  would  suffice  to  overcome  this 
indifference  and  to  bring  about  their  investment  in  productive 
undertakings.  Even  this  low  interest  rate,  however,  would  be 
sufficient  to  balance,  in  some  additional  cases,  the  difference  be- 
tween the  intensity  of  present  wants  and  the  intensity  of  future 
wants,  so  that  in  these  cases,  in  turn,  spending  or  saving  would  be  a 
matter  of  indifference  —  an  indifference  that  would  in  its  turn  be 
overcome  by  a  slight  increase  in  the  interest  rate.  In  a  similar 
way  every  increase  in  the  interest  rate  would  induce  more  persons 
to  save  and  would  induce  many  of  those  who  were  already  saving 
a  part  of  their  incomes  to  save  a  larger  proportion  of  them.  At 
any  given  time,  accordingly,  the  interest  rate  is  considerably  higher 
than  would  be  necessary  to  compensate  for  a  large  part  of  the  wait- 
ing that  devolves  upon  those  who  furnish  capital  funds  for  pro- 
ductive purposes.  It  is  just  high  enough,  however,  to  be  a  recom- 
pense for  marginal  waiting,  which  is  the  waiting  that  would  not 
take  place  if  the  interest  rate  were  any  lower.  If  the  interest  rate 
is  5  per  cent,  a  dollar  to-day  is  worth  a  dollar  and  five  cents  a 
year  from  to-day,  not  to  all  savers,  but  to  the  marginal  savers. 

The  Investment  of  Capital.  —  We  have  seen  that  the  supply  of 
capital  originates  in  the  fact  that  some  people  save  part  of  their 
money  incomes,  and  that  interest  has  to  be  paid  in  order  to  induce 
this  saving.  Such  persons  are  said  to  get  an  "  income  from  their 
capital."  Strictly  speaking,  their  savings  are  not  productive  capi- 
ital  at  all,  in  the  sense  in  which  the  word  "  productive  "  is  used  in 
this  book.  Productive  capital  consists  of  the  concrete  material 
instruments  of  production,  such  as  factory  buildings,  machines, 
raw  materials,  merchants'  stocks  of  finished  products,  and  the 
like.  Savings  are  not  productive  capital  in  this  sense,  but  the 
process  by  which  they  are  transmuted  into  productive  capital  is  a 
simple  and  familiar  one.  The  simplest  case  is  where  the  entre- 
preneur saves  part  of  his  own  money  income  and  uses  his  savings 
in  the  purchase  of  additional  capital  goods,  the  value  of  the  prod- 


INTEREST  423 

ucts  of  which  he  estimates  will  be  large  enough  to  repay  him  for 
his  waiting,  as  well  as  to  replace  his  capital  as  it  is  used  up,  that 
is,  to  earn  interest  for  him  as  well  as  repay  the  principal.  Or,  the 
entrepreneur  may  borrow  money  directly  from  others  who  have 
saved  it,  agreeing  to  pay  annual  interest,  and  in  addition  to  repay 
the  amount  of  the  loan  —  the  principal  —  at  some  specified  time. 
In  the  complex  economy  of  the  present,  however,  it  very  often 
happens  that  the  entrepreneur  who  can  use  money  profitably  and 
the  man  who  has  surplus  funds  to  invest  do  not  arrange  the  trans- 
action directly.  Savings  are  "  placed  at  interest "  in  savings  banks, 
insurance  companies,  or  other  financial  institutions,  and  it  is  to 
such  institutions  that  the  entrepreneur  who  thinks  that  he  can  use 
more  capital  profitably  applies  for  loans. 

Very  often  the  entrepreneur  is  a  corporation  rather  than  an  in- 
dividual, but  the  same  three  methods  of  obtaining  capital  are  open 
to  it.  The  corporation  may  choose  to  reinvest  some  of  its  net 
earnings  in  productive  forms  of  capital  rather  than  to  pay  them  all 
out  in  dividends  to  its  stockholders.  In  the  bookkeeping  of  many 
corporations,  such  savings  on  the  part  of  the  corporation  are  rep- 
resented by  the  item  called  "  surplus  "  on  the  balance  sheet;  in 
other  cases,  especially  with  railways,  it  may  happen  that  these 
reinvestments  of  earnings  are  hidden  by  unduly  enlarging  the  ac- 
counting item  of  "  maintenance  "  or  upkeep  of  the  plant,  so  that 
it  includes  the  expense  of  new  additions  of  capital.  When  in  need 
of  money  to  meet  a  temporary  emergency,  the  corporation  may 
borrow  from  banks  just  as  the  individual  entrepreneur  does. 
When  in  need  of  money  for  more  permanent  investment  in  the 
durable  forms  of  capital  goods,  the  corporation  usually  issues  its 
own  interest-bearing  obligations  in  the  form  of  bonds,  which  it 
sells  to  banks,  insurance  companies,  and  other  financial  institu- 
tions, as  well  as  to  individuals.  Bond  issues  are  only  one  way  of 
borrowing  money.  But  whether  the  money  funds  are  furnished  by 
the  entrepreneur  or  by  others,  the  formation  of  capital  necessi- 
tates, first,  the  saving  of  parts  of  money  incomes,  and  second,  the 
use  of  the  funds  thus  secured  in  the  purchase  of  capital  goods. 
The  expression  "  investment  of  capital  "  is  used  as  a  short  way  of 
describing  this  twofold  process. 


424  OUTLINES   OF  ECONOMICS 

The  Replacement  of  Capital.  —  It  is  clear,  then,  that  saving, 
which  necessitates  waiting,  is  a  prerequisite  to  the  formation  of 
neio  capital,  that  is,  to  an  increase  of  the  supply  of  capital  already 
in  existence.  But  at  any  given  time  the  capital  already  in  exist- 
ence forms  a  very  large  proportion  of  the  total  supply  of  capital, 
and  it  may  be  thought  that  the  present  interest  rate  does  not  affect 
this  portion  of  the  supply.  We  must,  however,  take  into  consid- 
eration the  fact  that  almost  all  kinds  of  capital  are  being  continu- 
ally used  up  in  production.  This  using  up  may  be  a  matter  of  a 
single  use,  as  in  the  case  of  fuel  or  raw  materials,  or  it  may  be  a 
gradual  wearing  out,  as  in  the  case  of  a  machine,  but  such  differ- 
ences are  differences  in  degree  of  durability  rather  than  differ- 
ences in  kind. 

As  we  have  seen,  the  entrepreneur  will  not  normally  employ 
any  given  additional  unit  of  capital  unless  he  expects  to  get  enough 
from  the  value  of  the  added  product  to  replace  the  capital  actually 
used  up  in  production  as  well  as  to  pay  interest.  This  means  that 
if  the  entrepreneur's  estimates  prove  correct,  part  of  the  money 
income  he  gets  for  his  product  may  be  regarded  as  a  replacement 
fund,  sufficient  in  amount  to  replace  the  capital  used  up  in  pro- 
duction. We  must  not,  however,  make  the  error  of  thinking  of 
the  replacement  fund  as  definite  in  quantity.  Whether  or  not  any 
unit  of  capital  produces  enough  to  furnish  a  replacement  fund, 
depends  on  whether  the  entrepreneur's  estimate  is  a  correct  one. 
There  is  no  reason  why  unproductive  forms  of  capital  should  be 
kept  intact  in  amount.  He  would  be  a  foolish  business  man,  for 
instance,  who  would  keep  reinvesting  a  certain  amount  of  money 
in  raw  materials  in  the  face  of  a  diminishing  demand  for  the  fin- 
ished product.  Even  if  enough  income  is  earned  to  form  a  re- 
placement fund,  the  capital  used  up  need  not  be  replaced  unless 
the  entrepreneur  so  chooses.  A  farmer  may  have  saved  for  years 
in  order  to  buy  a  reaper.  The  reaper  will  enable  him  to  raise 
more  wheat,  or,  possibly,  to  produce  the  same  amount  of  wheat  at 
less  expense.  In  either  case  it  will  mean  an  increase  in  his  net 
money  income.  He  can,  if  he  chooses,  set  aside  enough  of  this 
added  income  so  that,  when  the  first  reaper  wears  out,  his  accumu- 
lated funds  will  replace  it.  From  one  point  of  view  we  may  say 


INTEREST 


425 


that  in  this  way  the  reaper  "replaces  itself."  But  the  farmer  can, 
if  he  prefers,  use  all  of  his  increased  income  in  the  purchase  of 
additional  comforts  and  luxuries  for  himself  and  his  family.  In 
deciding  whether  he  will  replace  his  capital  or  increase  his  present 
consumption,  he  will  be  guided  by  the  same  kind  of  an  estimate 
of  the  relative  importance  of  present  and  future  wants  on  the  one 
hand,  and  of  the  amount  which  the  capital  will  add  to  his  income, 
on  the  other  hand,  that  guided  him  in  the  original  saving  which 
led  to  the  purchase  of  the  first  reaper. 

Similar  illustrations  can  be  found  in  other  kinds  of  undertak- 
ings. Many  business  enterprises  have  failed  because  business 
men  have  "lived  beyond  their  incomes"  —  which  often  means 
simply  that  they  have  not  replaced  their  capital  so  rapidly  as  they 
have  used  it  up.  Many  American  railways  have  maintained  a 
specious  prosperity  for  many  years  by  paying  "unearned  divi- 
dends " ;  that  is,  by  letting  their  capital  (roadbed,  rolling  stock, 
buildings,  etc.)  deteriorate  through  not  expending  enough  of  their 
gross  income  in  the  maintenance  of  their  way  and  equipment. 

The  stock  of  capital  in  existence  at  any  one  time  is  the  result  of 
past  saving.  But  this  stock  of  capital  cannot  be  maintained  intact 
without  more  saving.  From  this  point  of  view  we  may  say  that 
the  sacrifice  of  present  goods  for  future  goods  which  society  un- 
dergoes in  order  to  reap  the  advantages  of  capitalistic  production 
is  not  something  that  is  done  "once  for  all,"  but  is  a  continuous 
sacrifice. 

The  Shifting  of  Investment.  —  As  a  matter  of  fact,  a  large  amount 
of  the  capital  that  is  used  up  in  production  is  not  replaced,  for  the 
simple  reason  that  entrepreneurs  find  that  some  particular  kinds 
of  capital  are  not  profitable;  that  is,  they  do  not  add  enough  to 
the  value  of  the  entrepreneurs'  total  product  to  repay  them  for 
their  cost  (including  interest  and  replacement).  It  may  happen 
that  the  entrepreneur  has  been  mistaken  as  to  the  technical  effi- 
ciency (or  productivity)  of  his  capital,  or  that  he  has  overestimated 
the  demand  for  his  products.  New  inventions  or  new  methods  of 
production  may  lessen  the  income  yielding  power  of  part  of  the 
existing  stock  of  capital,  or  capricious  changes  in  demand  may 
have  a  similar  effect.  On  the  other  hand,  these  new  methods  of 


426  OUTLINES   OF  ECONOMICS 

production  and  these  changes  in  demand  are  making  new  forms 
of  capital  profitable.  Even  if  the  "replacement  fund"  were  a 
definite  and  rigid  annual  sum,  it  would  not  be  entirely  devoted  to 
replacing  the  particular  kinds  of  capital  that  had  been  used  up  in 
production.  There  would  be  a  continual  shifting  from  the  less 
profitable  to  the  more  profitable  forms  of  capital. 

We  often  hear  it  said  that  capital  is  transferred  from  one  indus- 
try to  another,  or  from  one  locality  to  another,  or  from  one  country 
to  another.  Such  expressions  are  misleading.  Capital  goods  are 
not  usually  transferred  in  this  fashion,  although  in  exceptional 
cases  it  may  happen.1  These  statements  often  mean  that  the 
ownership  of  capital  changes,  as  when  a  capitalist  sells  his  holdings 
in  one  industry  to  another  capitalist  and  invests  his  own  funds  in 
another  undertaking.  The  most  important  way  in  which  "capi- 
tal is  transferred  "  is  through  that  gradual  shifting  in  the  forms  of 
investment  which  has  just  been  described. 

The  Relation  of  the  Durability  of  Capital  Goods  to  Investment. 
—  The  ease  with  which  investments  of  capital  may  be  shifted 
varies  for  different  forms  of  capital.  Especially  important  in  this 
connection  is  the  durability  of  capital.  As  has  been  already  sug- 
gested, some  forms  of  capital  are  destroyed  as  capital  by  a  single 
use.  The  fuel  and  raw  materials  used  in  a  manufacturing  estab- 
lishment and  the  merchant's  stock  in  trade  belong  to  this  category. 
The  merchant's  stock  in  trade  becomes  consumption  goods  in  the 
hands  of  consumers:  raw  materials  reappear  in  the  finished  prod- 
uct, as  do  other  forms  of  capital  for  that  matter,  although  in  a  less 
obvious  sense.  But  the  fact  remains  that  these  particular  forms 
of  capital  investments  yield  their  services  only  once,  and  when  they 
are  once  used  by  the  entrepreneur  for  the  purpose  for  which  they 
were  intended,  they  cease  to  be  capital. 

From  such  transient  forms  of  capital  we  may  pass  by  insensible 
gradations  to  capital  goods  which  yield  a  long  succession  of  serv- 
ices, the  series  culminating  in  such  durable  forms  of  capital  as 

1  For  example,  some  generally  used  kinds  of  machinery  (such  as  lathes, 
milling  or  planing  machines,  engines,  or  motors)  may  be  transferred  from  one 
establishment  in  one  industry  to  an  establishment  in  another  industry,  or  draft 
horses  may  be  sold  by  farmers  to  merchants. 


INTEREST  427 

buildings  used  for  productive  purposes,  or  railway  roadbeds.  If  a 
particular  form  of  capital  lasts  for  exactly  a  year,  —  the  period  of 
time  usually  taken  as  a  unit  in  the  computation  of  the  rate  of  inter- 
est, —  estimating  the  expense  of  employing  such  capital  is  a  very 
simple  matter.  If,  for  example,  the  rate  of  interest  is  6  per  cent, 
an  entrepreneur  would  not  invest  $1000  in  such  capital  unless  he 
estimated  that  it  would  increase  his  product  by  an  amount  that 
would  sell  for  at  least  $1060.  In  the  case  of  the  more  transient 
forms  of  capital,  however,  the  computation  is  usually  made  by 
taking  into  account  the  "rate  of  turnover."  A  manufacturer  may 
be  continually  buying  raw  materials  and  making  them  into  fin- 
ished products.  If  the  raw  materials  purchased  during  a  year  cost 
$3000,  but  if,  on  the  average,  only  $1000  is  invested  in  raw  ma- 
terials at  any  one  time,  the  capital  is  said  to  be  "turned  over" 
three  times  during  the  course  of  the  year.  The  interest  rate  is 
computed  only  on  the  average  amount  of  capital  "tied  up,"  so 
that  interest  of  2  per  cent  on  each  turnover  would  amount  to 
6  per  cent  on  the  actual  investment  of  capital. 

In  the  case  of  the  more  durable  forms  of  capital  the  computa- 
tion is  more  complicated.  Here  the  entrepreneur  has  to  take  into 
account  not  only  the  original  expense  of  the  capital  good  and  the 
amounts  which  it  will  add  to  his  annual  product,  but  also  its  dura- 
bility, and  the  fact  that  a  large  part  of  the  income  which  it  will 
earn  for  him  is  future  income.  This  future  income,  as  we  have 
seen,  will  not  be  valued  so  highly  as  the  same  amount  of  present 
income  would  be. 

Suppose,  for  example,  that  the  entrepreneur  is  considering  the  purchase 
of  a  machine  which  will  be  worn  out  in  ten  years,  and  the  price  of  which  is 
$1000.  If  he  wishes  to  get  6  per  cent  interest  on  his  investment  (possibly 
because  he  has  to  pay  that  much  for  the  money  funds  he  uses),  he  cannot 
afford  to  purchase  the  machine  unless  it  will  increase  his  annual  product 
during  those  ten  years  by  an  account  that  will  sell  for  at  least  $136.  For 
$1000  is  the  present  value  of  an  annual  payment  of  $136  for  ten  years,  com- 
puted on  the  basis  of  an  annual  interest  rate  of  6  per  cent,  compounded 
annually.  If  he  is  satisfied  with  5  per  cent  interest,  a  probable  increase  of 
$130  in  the  annual  value  of  his  product  would  justify  the  investment.  From 
this  point  of  view  the  investment  of  capital  is,  so  far  as  the  entrepreneur's 
estimates  prove  correct,  equivalent  to  the  purchase  of  an  annuity  for  a  term  of 
years  corresponding  to  the  life  of  the  capital  good.  Of  course,  as  the  capital 


428  OUTLINES   OF  ECONOMICS 

wears  out,  its  productivity  is  apt  to  decrease.  Such  things,  together  with 
any  probable  changes  on  the  salability  of  the  product,  as  well  as  all  other 
contingencies  that  can  be  foreseen,  have  also  to  be  taken  into  account  by 
the  entrepreneur,  and  still  further  complicate  the  problem. 

It  is  obvious  that  the  entrepreneur  does  not  usually  make  an  elaborate 
mathematical  calculation  of  the  kind  suggested  here.  His  business  experi- 
ence and  knowledge  of  market  conditions  afford  the  basis  for  a  more  or  lest 
accurate  guess  as  to  the  profitableness  of  a  proposed  investment  of  capital. 
He  estimates  that  a  certain  machine  will  or  will  not  "earn  its  cost"  (including 
interest)  because  he  knows  something  about  the  profitableness  of  the  use  of 
similar  machines  in  his  own  or  other  establishments.  The  concrete  problem 
that  continually  presents  itself  to  the  entrepreneur  is  simply  that  of  getting 
the  maximum  of  salable  product  at  the  minimum  cost.  An  investment  in 
a  particular  machine  is  usually  judged  (except  in  the  case  of  new  under- 
takings), not  by  its  profitableness  as  measured  by  an  absolute  standard, 
but,  its  technical  efficiency  being  known,  by  its  profitableness  (as  to  product 
and  costs)  as  inferred  from  the  experience  of  the  entrepreneur  with  his  present 
appliances  and  methods. 

The  same  considerations  hold  true  for  investments  in  most  other  kinds  of 
capital  goods.  Nevertheless,  a  scientific  and  accurate  analysis  of  the  real 
profitableness  of  an  investment  has  to  follow  the  lines  that  have  been  indicated 
above.  In  fact,  in  the  most  scientific  forms  of  investment  (such  as  the  pur- 
chase and  sale  of  large  blocks  of  corporation  bonds  by  dealers  in  such  se- 
curities), the  results  of  elaborate  actuarial  calculations  are  utilized.  That 
such  calculations  are  made  by  those  who  supply  capital  rather  than  by  the 
users  of  capital,  comes  from  the  fact  that  the  supply  of  capital  (so  far  as  it  is 
not  furnished  by  the  entrepreneur  himself)  is  under  a  definite  contract  on  the 
part  of  the  entrepreneur  as  to  the  amount  of  interest  to  be  paid  and  as  to  the 
time  when  the  principal  is  to  be  paid.  In  many  such  loans  the  element  of 
risk  to  the  capitalist  is  almost  entirely  eliminated,  and  the  calculation  of  the 
present  values  of  such  investments  becomes  accordingly  a  simple  matter  of 
mathematics. 

The  Expense  and  Value  of  Capital.  —  When  we  speak  of  the  cost 
or  expense  of  capital,  we  may  have  in  mind  either  one  of  two  dis- 
tinct things.  We  may  mean  the  price  paid  by  the  entrepreneur 
for  the  loan  of  the  money  funds  which  he  invests  in  specific  kinds 
of  capital  goods,  or  we  may  mean  the  prices  paid  for  the  capital 
goods  themselves.  The  first  thing  is,  of  course,  loan  interest; 
the  second  is  simply  a  matter  of  the  market  prices  of  commodities. 
It  is  this  second  thing  —  the  market  price  of  capital  goods  —  that 
we  wish  to  consider  at  this  point.  As  commodities,  these  capital 
goods  come  under  the  general  laws  of  value  and  price,  and  most  of 


INTEREST  429 

what  has  been  said  in  earlier  chapters  about  the  valuation  of  con- 
sumption goods  holds  just  as  true  in  respect  to  the  valuation  of 
these  production  goods.  Their  price  at  any  given  time  is  apt  to 
be  fixed  rather  close  to  the  point  where  demand  and  supply  would 
be  in  equilibrium.  In  the  long  run  their  values  —  if  they  are  not 
patented  products,  but  are  competitively  produced  —  cannot  get 
very  far  away  from  the  expenses  of  producing  them. 

But  there  is  one  fundamental  difference  which  has  been  sug- 
gested in  other  connections.  Consumption  goods  are  valued  be- 
cause they  satisfy  human  wants,  and  the  intensity  of  the  wants 
which  particular  units  of  goods  satisfy  have,  through  the  law  of 
marginal  utility,  a  very  direct  relation  to  their  market  values. 
Capital  goods  do  not  satisfy  human  wants  directly;  they  are  val- 
ued simply  because  they  aid  in  the  production  of  goods  that  do 
satisfy  human  wants  directly.1  The  demand  for  them,  as  we  have 
seen,  is  the  entrepreneurs'  interpretation  of  the  demand  for  their 
products.  The  law  of  diminishing  productivity  bears  about  the 
same  relation  to  the  determination  of  their  values  that  the  law  of 
diminishing  utility  does  to  the  determination  of  the  values  of  con- 
sumption goods.  As  in  the  case  of  the  demand  for  labor,  the 
elasticity  of  the  demand  for  a  particular  sort  of  capital  goods  is 
affected  not  only  by  the  fact  that  the  higher  the  cost  of  the  capital, 
the  higher  will  have  to  be  the  price  of  the  product,  and,  conse- 
quently, the  smaller  will  be  the  quantity  of  the  product,  that  can  be 
sold,  but  also  by  the  fact  that  when  the  cost  of  any  variety  of  capi- 
tal goods  is  relatively  high,  the  entrepreneurs  will  economize  in 
the  use  of  that  particular  kind  of  capital  and  will  use  relatively 
more  labor,  relatively  more  land,  and  relatively  more  of  the  other 
forms  of  capital.  The  first  of  these  facts  is  a  corollary  of  the  law 

1  Here  as  elsewhere  in  the  present  discussion  of  interest,  no  account  is  taken 
of  the  obvious  fact  that  many  kinds  of  capital  goods  are  used  in  the  production 
of  other  capital  goods,  rather  than  in  the  production  of  consumption  goods 
directly.  There  may  be  in  many  cases  a  large  number  of  steps  in  the  productive 
process  before  the  final  goal  —  the  satisfaction  of  human  wants  —  is  reached. 
A  consideration  of  these  facts  would  only  make  the  analysis  more  involved, 
without  changing  in  the  slightest  degree  the  conclusions  reached.  They  are, 
however,  taken  into  account  in  the  discussion  of  the  "social  dividend,"  in 
Chapter  XXV. 


430  OUTLINES   OF   ECONOMICS 

of  diminishing  utility,  the  second,  a  corollary  of  the  law  of  dimin- 
ishing productivity. 

This  analysis  of  the  value  of  capital  goods  relates,  however,  only 
to  the  supply  of  new  capital  goods.  After  capital  is  once  definitely 
invested  in  industry,  its  value  is  determined  solely  by  its  ability  to 
earn  an  income  for  its  owner.  If  the  entrepreneur  has  overesti- 
mated the  technical  efficiency  of  a  machine  or  the  salability  of  its 
products,  that  is,  if  he  has  overestimated  its  income-yielding 
power,  he  may  find  that  its  value  is  less  than  the  price  he  held  for 
it.  Here,  however,  we  have  to  note  an  important  distinction  be- 
tween free  capital  and  specialized  capital.  By  free  capital  we  mean 
capital  that  has  a  number  of  different  possible  uses,  or  that  can  be 
transferred  from  one  industry  or  one  establishment  to  another. 
Specialized  capital  is  capital  that  can  be  used  for  only  one  purpose, 
and  that  cannot  be  transferred  from  one  establishment  or  industry 
to  another. 

The  capital  invested  in  the  construction  of  a  railway  roadbed, 
or  in  the  digging  of  an  irrigation  ditch,  is  absolutely  specialized. 
The  roadbed  and  the  irrigation  ditch  are  of  use  only  in  connection 
with  the  particular  transportation  or  agricultural  undertakings 
for  which  they  were  constructed.  If  the  undertakings  should  fail, 
the  value  of  these  specialized  forms  of  capital  would  be  absolutely 
wiped  out.  A  manufacturing  firm  may  invest  a  large  amount  of 
money  in  new  models  of  specially  designed  machinery.  If  the 
new  machines  prove  unsuccessful,  their  value  may  sink  to  what 
they  will  sell  for  as  scrap  iron.  On  the  other  hand,  we  have  free 
capital  in  such  forms  as  tools,  machines  of  the  standard  models 
that  are  used  in  different  establishments  in  the  same  industry,  or 
even  in  different  industries ;  raw  materials  that  can  be  made  up 
into  different  kinds  of  finished  products  and  the  like.  A  farmer 
who  stocks  his  farm  with  dairy  cattle,  but  finds  his  land  unsuited 
for  a  dairy  farm,  does  not  incur  a  total  loss  on  his  investment,  for 
he  can  sell  his  cattle  to  some  farmer  who  can  make  profitable  use 
of  them.  The  distinction  here  emphasized  is  only  one  of  degree. 
We  have  capital  in  a  considerable  variety  of  forms  that  are  partly 
free  and  partly  specialized.  Such  capital  is  capital  that  is  best 
adapted  to  one  specific  purpose,  but  which  may  also  be  put  to 


INTEREST  431 

other  uses.  One  frequently  sees  buildings,  originally  erected  for 
office  purposes  on  a  badly  chosen  site,  that  have  been  given  over 
to  small  manufacturing  concerns.  A  building  intended  for  a  fac- 
tory may  serve  fairly  well  as  a  warehouse. 

The  importance  of  these  distinctions  lies  in  the  fact  that  the  pos- 
sibility of  alternative  uses  forms  a  barrier  to  the  depreciation  of  the 
value  of  the  free  capital  that  is  found  to  yield  less  income  in  some 
particular  use  than  was  expected  by  the  entrepreneur.  If  such 
goods  can  yield  a  larger  income  in  some  other  use,  they  can  be  trans- 
ferred (through  a  change  in  the  nature  of  the  entrepreneur's  busi- 
ness or  through  sale  or  lease  to  other  entrepreneurs)  to  this  more 
profitable  use.  Such  transfers  are  continually  taking  place  in 
actual  business. 

Capital  and  Land.  —  The  analysis  of  the  process  by  which  capital  is 
valued  opens  the  way  for  a  consideration  of  a  problem  that  has  been  suggested 
in  earlier  pages,  —  the  reason  for  the  economic  distinction  between  capital 
and  land.  Some  points  of  similarity  are  obvious:  land  and  capital  are 
both  valued  according  to  their  income-yielding  power.  The  selling  value  of 
land,  like  the  selling  value  of  capital,  is  simply  the  capitalization  of  the  pro- 
spective income  to  be  derived  from  it.  From  the  point  of  view  of  the  individ- 
ual investor  the  purchase  of  land  for  productive  purposes  is  an  investment 
of  capital  just  as  truly  as  is  the  purchase  of  capital  goods. 

Yet  there  are  equally  obvious  differences :  land  is  given  by  nature ;  capital 
is  "man-made."  The  amount  of  land  is  limited  —  a  statement  that  holds 
true  whether  we  have  in  mind  the  land  actually  available  for  productive 
uses  under  existing  conditions,  or  whether  we  have  in  mind  the  whole  surface 
of  the  earth.  The  supply  of  capital,  on  the  other  hand,  is  capable  of 
indefinite  extension.  It  may  be  said,  of  course,  that  an  extension  of 
transportation  facilities,  by  which  the  available  supply  of  land  is  increased, 
is  a  "  production  of  land."  This  is,  however,  only  a  figurative  use  of  the 
word  "production."  In  this  figurative  sense  the  growth  of  a  city,  by  which 
barren  areas  become  desirable  building  lots  or  factory  sites,  is  likewise  a 
"  production  of  land."  The  recent  opening  up  of  the  Canadian  Northwest 
has  been  due  to  the  production  of  capital  in  the  form  of  railroads.  The 
land  was  already  there,  but  the  necessary  form  of  capital  was  lacking. 
Another  distinction  is  found  in  the  fact  that  land,  in  its  most  essential 
qualities,  is  a  permanent  thing,  while  capital  is  of  all  possible  degrees  of 
durability. 

These  obvious  physical  differences  between  land  and  capital  would  hardly 
justify  us  in  drawing  a  line  between  them  in  a  discussion  of  the  distribution 
of  wealth  unless  these  physical  differences  were  the  causes  of  differences  in 


432  OUTLINES   OF  ECONOMICS 

the  ways  in  which  the  incomes  from  land  and  capital  are  determined  —  dif- 
ferences, that  is,  between  rent  and  interest.  Here,  again,  we  find  points  of 
similiarity  and  points  of  difference.  The  points  of  likeness  become  promi- 
nent when  we  view  the  mechanism  of  wealth  production  as  it  exists  at  any 
given  time,  but  become  less  significant  as  we  shift  our  view  to  the  forces  at 
work  through  a  considerable  period  of  time. 

If,  for  example,  we  could  take  something  like  an  instantaneous  photograph 
of  the  processes  of  the  production  and  distribution  of  wealth,  we  would  see  no 
important  differences  between  the  capital  and  the  land  used  in  production. 
We  would  see  that  society  is  equipped  with  a  stock  of  capital  goods,  in  all 
stages  of  wear,  of  all  possible  degrees  of  technical  efficiency,  and  varying 
greatly  in  fitness  or  adaptability  to  the  work  of  producing  the  particular 
products  that  consumers  are  demanding.  Not  all  of  these  capital  goods  are 
yielding  an  income  that  is  sufficient  to  provide  for  their  replacement  as  they 
wear  out,  and  in  addition  to  pay  a  surplus,  or  premium,  in  the  term  of  in- 
terest. Some,  it  is  true,  may  be  yielding  even  more  than  the  amount  neces- 
sary for  these  purposes.  Machinery  of  new  and  exceptionally  efficient  sorts, 
but  not  as  yet  of  widespread  or  general  use;  raw  materials  or  dealers' 
stocks  of  goods  that,  by  reason  of  a  sudden  increase  in  demand,  are  selling  at 
an  exceptionally  high  price,  —  such  capital  goods  may  be  earning  consider- 
ably more  than  interest  and  replacement. 

On  the  other  hand,  we  see  a  large  amount  of  capital  in  such  forms  as  obso- 
lete kinds  of  machines,  ill-planned  factory  buildings,  raw  materials  or  dealers' 
stocks  in  trade  that  were  bought  in  expectation  of  a  demand  that  did  not 
materialize.  Such  capital  goods  may  earn  considerably  less  than  interest 
and  replacement.  When  capital  is  once  fixed  in  definite  forms,  the  question 
of  the  original  money  cost  of  the  capital  does  not  enter  into  the  question  of 
the  profitableness  of  using  it.  An  entrepreneur  who  borrows  money  to  invest 
in  capital  goods  has  to  repay  the  interest  and  ultimately  the  principal  of  the 
loan,  whether  this  particular  investment  of  capital  proves  sufficiently  remuner- 
ative or  not.  In  accounting  practice  such  expenses  are  called  "  fixed  charges," 
because  they  go  on  whether  the  capital  is  used  profitably  or  not.  In  fact, 
the  entrepreneur  will  find  it  to  his  advantage  to  use  the  capital,  rather  than  to 
let  it  lie  idle,  so  long  as  its  use  adds  anything  to  his  total  net  income.  A  ma- 
chine may  thus  be  worth  using,  even  if  not  worth  replacing;  dealers  can 
better  afford  to  sell  their  goods  for  less  than  they  paid  for  them  than  not  to  sell 
them  at  all;  a  landlord  will  prefer  to  rent  a  building  at  a  very  low  cost, 
rather  than  to  let  it  remain  vacant.  Capital  goods  that  are  just  barely  worth 
using  may  be  called  "marginal  capital  goods,"  and  are,  from  our  present 
viewpoint,  analogous  to  marginal  land.  At  any  given  time,  then,  the  exist- 
ing capital  goods  which  it  does  not  pay  to  use  may  be  thought  of  as  "  below 
the  margin,"  while  the  income  yielded  by  the  better  capital  goods  may  be 
thought  of  as  a  rent  of  capital,  analogous  in  many  ways  to  the  rent  of  land. 
For  this  reason  Professor  Marshall  has  called  the  income  from  capital  goods, 


INTEREST  433 

when  the  point  of  view  takes  into  account  only  a  short  period  of  time, 
quasi-rent. 

When,  however,  we  shift  our  point  of  view  so  as  to  take  into  account  a 
longer  period  of  time,  we  see  an  important  difference  between  the  income 
from  land  and  the  income  from  capital.  We  see,  then,  that  society's  stock  of 
capital  is  a  shifting  thing.  On  the  one  hand,  it  is  being  continually  depleted 
on  account  of  the  fact  that,  in  the  process  of  production,  capital  goods  are 
being  used  up,  worn  out,  or  because  they  are  in  some  cases  passing  for  other 
reasons  below  the  margin  of  profitable  use.  On  the  other  hand,  the  stock 
of  capital  is  being  continually  replenished  by  the  investment  of  savings  in 
new  forms  of  capital  goods.  Most  of  these  investments  merely  replace  capi- 
tal that  has  been  worn  out  or  used  up,  but  some,  and  in  a  progressive  society, 
a  considerable  proportion,  represent  the  creation  of  new  forms  of  capital. 

Now,  as  we  have  seen,  the  investment  of  savings  in  capital  goods  is  guided 
by  the  estimates  that  entrepreneurs  make  of  the  profitableness  of  these  invest- 
ments, the  criterion  of  the  profitableness  of  any  possible  investment  being  its 
ability  to  replace  the  principal  and  provide  for  the  interest  on  the  money 
invested.  When  experience  has  shown  that  particular  forms  of  capital  will 
not  measure  up  to  this  standard  of  profitableness,  these  forms  will  not  be 
replaced  as  they  wear  out.  When  certain  forms  of  capital  enable  entrepre- 
neurs to  get  any  considerable  surplus  over  and  above  interest  and  replacement, 
the  tendency  will  be,  so  far  as  competition  rules  (that  is,  so  far  as  monopoly, 
as  in  the  case  of  patented  machinery,  does  not  prevent),  to  increase  the 
investments  in  these  forms  of  capital,  and  in  this  way  to  force  the  earnings  of 
these  specially  advantageous  forms  of  capital  down  to  the  common  level  of 
interest  and  replacement.  Just  as  the  expense  of  producing  consumption 
goods  forms  a  "  normal  value,"  to  which  their  actual  prices  (under  competitive 
condition)  continually  tend  to  approximate,  so  the  expenses  incurred  in  in- 
vestments of  capital  form  a  "normal  remuneration  of  capital,"  toward  which 
its  actual  earnings  continually  tend.  Similarly,  the  value  of  capital,  although 
actually  determined  at  any  one  time,  like  the  value  of  land,  by  its  ability  to 
earn  an  income  for  its  possessor,  tends  in  the  long  run  to  approximate  the 
expense  of  producing  capital.  This  expense  includes,  it  must  be  remembered, 
both  the  actual  money  cost  of  new  capital  goods  and  the  expense  of  interest 
on  this  money  cost.  Normal  interest  is  the  interest  on  absolutely  free  capital 
in  the  form  of  loanable  funds. 

Land,  of  course,  has  no  normal  value,  because  it  has  no  cost  of  production. 
This  difference  is  not  of  mere  theoretical  importance,  but  has  an  important 
bearing  upon  many  social  problems.  For  example,  when  we  take  a  long 
period  of  time  into  account,  no  such  thing  as  an  "unearned  increment" 
appears  in  the  value  of  capital.  Moreover,  while  both  rent  and  interest  are 
alike  in  the  sense  that  they  are  payments  for  productive  services,  interest  is 
more  clearly  an  earned  income  than  is  rent.  For  productivity  has  to  be 
imputed  to  capital  because  its  supply  is  limited  on  account  of  its  expenses 

2  F 


434  OUTLINES   OF  ECONOMICS 

of  production  and  on  account  of  the  sacrifices  involved  in  waiting,  while 
productivity  is  imputed  to  the  better  lands  simply  because  the  supply  of  them 
is  limited  by  nature.  When  we  measure  rent  as  a  return  per  acre  (or  other 
unit)  of  land,  and  interest  as  a  percentage  on  the  money  invested,  we  recognize 
this  fundamental  distinction  between  rent  and  interest.  That  rent  may 
be  viewed  for  some  purposes  as  interest  on  the  value  of  the  land,  and  that  in- 
terest (and  replacement)  may  similarly  be  viewed  (at  any  given  time)  as  a 
"quasi-rent"  of  capital  goods,  does  not  alter  the  fundamental  nature  of  the 
distinction. 

We  have  seen  in  another  connection  that  the  shifting  of  investment  by 
which  the  earnings  of  capital  are  made  to  tend  toward  a  normal  standard  is 
easier  in  the  case  of  the  more  transient  forms  of  capital  than  in  the  case  of 
the  more  durable  forms.  The  more  durable  a  capital  good  the  more  nearly 
is  the  income  derived  from  it  analogous  to  the  rent  of  land.  As  was  suggested 
in  the  discussion  of  rent,  it  is  not  necessary  or  advisable  to  draw  a  hard  and 
fast  line  between  capital  and  land.  Permanent  investments  of  capital  in  the 
form  of  improvements  to  land  may  very  properly  be  regarded  as  land.  The 
farmer  who  is  contemplating  installing  a  drainage  system  or  an  irrigation 
system  for  his  land  views  such  an  investment,  at  the  time,  as  an  investment 
of  capital.  But  when  the  capital  is  definitely  incorporated  with  the  land  in 
these  permanent  forms,  there  is  no  reason  why  it  should  be  called  capital 
rather  than  land.  The  total  income  yielded  by  the  improved  acres  will,  in 
all  essential  particulars,  be  land  rent. 

Capital  and  Consumption  Goods.  —  There  arc  also  some  points  of  like- 
ness between  capital  and  the  more  durable  forms  of  consumption  goods.  The 
person  who  buys  a  piano  is  not  only  satisfying  his  present  wants,  but  expects 
to  get  from  it  a  long  period  of  use,  extending  into  the  future.  The  purchase 
of  any  durable  consumption  good  is  in  this  way  one  form  of  saving  for  the 
future.  Moreover,  such  provisions  for  future  wants  will  not  be  made  unless 
we  feel  that  these  future  wants  are  important  enough  to  justify  us  in  giving 
up  some  possible  present  satisfaction.  In  other  words,  we  will  not  substitute 
future  utilities  for  present  utilities  by  the  purchase  of  durable  consumption 
goods  unless  the  future  utilities  are  enough  greater  than  the  present  utilities 
to  compensate  us  for  the  necessary  waiting.  This  compensation  for  the  dif- 
ference between  present  satisfactions  and  future  satisfactions  is  obviously 
analogous  to  interest. 

These  facts  must  be  taken  into  account  in  any  full  analysis  of  the  valuation 
of  consumption  goods,  but  they  do  not  justify  us  in  obliterating  the  line  be- 
tween capital  and  consumption  goods.  Consumption  goods  yield  directly 
an  income  of  satisfactions;  capital  yields  a  money  income,  but  only  in  an 
indirect  way  does  it  yield  an  income  of  satisfactions.  A  rented  house  is  not, 
from  the  social  point  of  view,  capital.  It  yields  a  direct  income  of  satisfactions 
to  its  occupant ;  the  fact  that  the  landlord  sells  the  annual  use  of  it  instead 
of  selling  the  permanent  property  rights  in  it  is  a  fact  of  minor  significance. 


INTEREST  435 

A  merchant's  stock  in  trade  is  capital  because  it  will  yield  a  money  income 
to  its  possessor ; l  when  sold  to  consumers,  the  same  goods  become  consump- 
tion goods  because  they  yield  an  income  of  satisfactions.  In  short,  the  dis- 
tinction between  capital  and  consumption  goods  is  based  upon  one  of  the 
most  fundamental  things  in  the  existing  economic  system  —  the  fact  that 
the  income  which  men  receive  for  the  productive  services  of  their  capital 
are  money  incomes. 

Capital  and  Wages.  —  In  many  undertakings  wages  are  paid  to  workmen 
engaged  in  the  production  of  goods  before  the  goods  are  sold.  A  farmer, 
for  example,  has  to  pay  his  harvest  hands  and  other  workmen  before  he 
receives  any  money  from  the  sale  of  his  wheat.  Whether  he  borrows  the 
amount  needed  for  wages,  or  whether  he  pays  them  out  of  his  own  savings, 
interest  on  the  amount  advanced  has  to  be  counted  among  the  expenses  of 
production,  and  the  wages  advanced  are,  for  the  time  being,  an  investment 
of  capital.  In  most  manufacturing  establishments  a  more  or  less  lengthy 
average  period  of  time  elapses  between  work  actually  done  by  the  workmen 
and  the  sale  of  the  products  of  their  work.  In  such  establishments  a  con- 
siderable amount  of  capital  is  invested  in  wage  advances.  This  does  not 
mean  that  we  are  to  consider  the  laborers  as  being  in  any  sense  capital.  For 
the  gradual  process  by  which  the  raw  material  becomes  the  finished  product 
is  itself  a  continuous  investment  of  capital.  All  of  the  various  expenses  of 
production  are  really  different  ways  of  investing  money  in  capital  goods. 
Add  to  the  cost  of  the  raw  material  all  of  the  expenses  (including  wages  and 
payments  of  rent  and  interest  as  well)  incurred  in  order  to  produce  the 
finished  product  of  the  establishment,  and  you  have  simply  the  total  invest- 
ment in  capital  goods  in  the  form  of  the  finished  product.  A  complete 
inventory  of  capital  goods  would  include  then  (in  addition  to  buildings, 
machinery,  etc.)  not  only  raw  materials  and  the  finished  products  that  are 
ready  for  sale  to  consumers,  but  also  the  products  on  hand  at  any  one  time  in  a 
partly  finished  state.  Thus,  though  the  payment  of  wages  is  often  an  invest- 
ment of  capital,  it  must  be  remembered  that  the  payment  of  wages  is  only 
one  of  the  ways  in  which  money  is  invested  in  concrete,  definite,  capital  goods. 

The  Rate  of  Interest.  —  Interest,  as  the  price  paid  for  the  serv- 
ices of  capital,  is  determined  by  the  supply  and  demand  of  capital. 
By  this  we  mean,  not  the  supply  and  demand  of  concrete  capital 
goods,  —  a  matter  which  comes  under  the  general  laws  of  price,2  — 
but  the  supply  and  demand  of  the  loanable  funds,  the  money 
capital  which  is  available  for  investment  in  concrete  capital  goods. 

1  The  relation  of  goods  to  their  possessors,  rather  than  to  their  owners,  gives 
the  more  satisfactory  basis  for  the  distinction  between  capital  goods  and  corn- 
sumption  goods.  The  example  of  the  rented  house  makes  this  clear. 

a  See  discussion  of  the  expense  and  value  of  capital  on  page  428. 


436  OUTLINES   OF   ECONOMICS 

The  demand  for  capital,  as  we  have  seen,  is  based  ultimately  on 
the  demand  for  the  products  of  capital;  that  is,  on  the  demand  for 
consumption  goods.  The  entrepreneur  bases  his  demand  for  capi- 
tal upon  his  estimate  of  the  demand  for  his  products,  together 
with  his  estimate  of  the  relative  economy  of  the  use  of  different 
amounts  of  capital.  In  combining  labor,  capital,  and  land  for 
productive  purposes,  he  will  be  guided  consciously  or  unconsciously 
by  the  law  of  diminishing  productivity.  He  has  to  take  into  ac- 
count in  this  connection  both  the  technical  efficiency  (that  is,  the 
real  productive  efficiency)  and  the  expense  of  land,  labor,  and  dif- 
ferent kinds  of  capital.  This  latter  consideration  means  that  the 
interest  rate  is  itself  one  of  the  factors  determining  the  demand  for 
capital.  The  higher  '"he  rate  of  interest,  the  greater  will  be  the 
expenses  of  production,  and  the  smaller,  in  general,  will  be  the  de- 
mand for  those  goods,  in  the  production  of  which  the  use  of  capital 
plays  an  especially  important  part.  Moreover,  the  higher  the  in- 
terest rate,  the  smaller,  other  things  being  equal,  will  be  the  rela- 
tive proportions  of  capital,  and  the  larger  will  be  the  relative  pro- 
portions of  labor  and  land  which  it  will  pay  entrepreneurs  to  use. 

As  the  technical  efficiency  of  capital  is  increased  through 
the  progress  of  science  and  invention,  the  more  profitable  does 
its  use  become.  For  the  demand  for  it  increases  not  only 
because  the  consequent  reduction  in  the  prices  of  goods  means 
larger  sales,  but  also  because  the  use  of  larger  proportions  of  capi- 
tal in  production  becomes  advisable.  The  entrepreneur  wants 
simply  the  maximum  productive  efficiency  at  the  least  cost.  A 
unit  of  productive  efficiency  in  the  form  of  capital  becomes  cheaper, 
first,  as  the  interest  rate  decreases,  and  second,  as  a  given  outlay 
will  purchase  more  efficient  forms  of  capital  goods. 

The  supply  of  capital  depends  ultimately  upon  the  supply  of 
waiting.  This,  as  we  have  seen  in  the  discussion  of  the  necessity 
of  interest,  is  something  which  varies  with  the  interest  rate.  Other 
things  being  equal,  the  higher  the  interest  rate,  the  larger  will  be 
the  parts  of  money  incomes  that  will  be  saved  rather  than  spent 
immediately  in  the  satisfaction  of  wants.  It  has  sometimes  been 
said  that  saving  increases  as  wealth  increases.  If  this  is  taken  to 
mean  that  the  larger  the  income  of  the  individual,  the  larger,  other 


INTEREST  437 

things  being  equal,  will  be  the  amount  he  will  save,  the  statement 
probably  expresses  a  general  truth.  The  larger  the  income,  the 
less  important  are  the  immediate  wants  dependent  for  their  satis- 
faction on  a  given  amount  of  money.  It  does  not  follow  that  the 
proportion  of  the  income  that  is  saved  is  apt  to  be  any  larger  in  the 
case  of  a  large  income  than  a  small  income.  If,  on  the  other  hand, 
the  statement  is  taken  to  refer  to  the  increase  of  wealth  in  society 
at  large,  we  have  to  take  account  of  the  fact  that  as  wealth  increases 
new  wants  develop,  and  the  net  effect  on  saving  is  apt  to  depend 
on  the  character  of  the  new  wants,  —  whether  they  call  for  increased 
current  expenditures  or  whether  they  involve  the  accumulation  of 
considerable  sums.  Convenient  opportunities  for  saving,  such  as 
those  afforded  by  savings  banks,  insurance  companies,  and  the 
supply  of  convenient  forms  of  investment  securities  have  (apart 
from  the  rate  of  interest  they  offer)  an  important  effect  upon  the 
amount  of  saving. 

Gross  Interest  and  Net  Interest.  —  Net  interest  is  pure  interest  — 
the  amount  actually  necessary  to  recompense  marginal  waiting. 
Gross  interest  —  the  interest  actually  paid  on  loans  —  includes 
payments  for  other  things.  In  the  first  place,  actual  interest  often 
includes  some  payment  for  the  supervision  which  the  capitalist 
has  to  maintain  over  his  investment.  Even  the  man  who  "lives 
on  his  income"  usually  has  to  devote  a  certain  amount  of  time  to 
the  investigation  of  the  safety  of  different  possible  investments,  to 
the  collection  of  interest  and  principal  and  similar  things.  The 
net  earnings  of  a  savings  bank  —  the  difference  between  the  in- 
terest they  get  on  their  investments  and  the  interest  they  pay  their 
depositors  —  are  partly  a  payment  for  this  element  of  supervision. 

A  second  element  in  gross  interest  is  the  payment  for  the  risk 
the  lender  undergoes  of  losing  all  or  part  of  his  expected  income 
(including  principal  and  interest).  This  does  not  mean,  as  some 
writers  have  said,  that  the  interest  rate  contains  an  element  of 
insurance,  for  insurance  means  the  elimination  of  individual  risk 
through  the  combination  of  risks.  The  fact  is  simply  that,  as 
every  one  knows,  lenders  will  not  take  greater  risks  without  the 
prospect  of  greater  gains.  There  is  some  element  of  speculation 
in  all  loans  but  the  very  safest,  and  the  extra  income  received  on 


438  OUTLINES   OF  ECONOMICS 

the  more  legitimate  loans  is  more  akin  to  speculative  profits  than 
to  insurance. 

Usury  Laws.  —  Interest  is  one  form  of  price  in  regard  to  which 
society  still  expresses  some  distrust  of  the  operation  of  unhindered 
competitive  forces.  Only  nine  American  states  do  not  provide  a 
legal  maximum  above  which  the  interest  rate  cannot  legally  be 
fixed.  Such  laws  are  based  on  the  justifiable  assumption  that  the 
borrower  is  in  many  cases  the  weaker  bargainer,  pressed  often  by 
that  necessity  which  "never  drove  a  good  bargain."  In  many 
cases  the  laws  are  not  enforced,  but  in  other  cases  they  do  have  an 
important  effect  on  some  kinds  of  loans,  especially  bank  loans  in 
the  rural  districts,  —  farm  mortgages  and  overdue  book  credits. 
It  is  to  be  feared,  however,  that  their  result  is  often  not  so  much 
to  lower  the  rate  of  interest  as  to  cut  off  many  loans  which  lenders 
would  not  be  justified  in  making  except  at  high  rates  of  interest. 
In  the  case  of  many  loans  on  fairly  good  security,  however,  usury 
laws  have  probably  operated  to  the  advantage  of  the  borrowers. 

QUESTIONS  AND   EXERCISES 

1.  Could  a  socialist  state  dispense  with  interest?  with  waiting? 

2.  How  has  the  rate  of  interest  been  affected  by  the  opening  up  of  new  and 
fertile  lands  ? 

3.  Use  supply  and  demand  curves  to  illustrate  the  determination  of  the 
rate  of  interest. 

REFERENCES 

BOHM-BAWERK,  E.  VON.     Capital  and  Interest;    and   Positive  Theory  of 

Capital,  Books  V-VII. 

CARVER,  T.  N.     The  Distribution  of  Wealth,  Chap.  VI. 
CASSELL,  G.     The  Nature  and  Necessity  of  Interest. 
FISHER,  IRVING.     Capital  and  Income  and  The  Rate  of  Interest. 
GONNER,  E.  C.  K.     Interest  and  Saving. 
MARSHALL,  ALFRED.     Principles  of  Economics,  4th  ed.,  Vol.  I,  Book  II, 

Chap.  IV;    Book  IV,   Chap.    VII;    Book   V,    Chap.  IX;    Book  VI, 

Chap.  VI. 


CHAPTER    XXV 
PROFITS 

THE  difference  between  the  total  money  income  which  an  en- 
trepreneur receives  and  his  expenses  of  production  constitutes 
his  profits.  Profits,  then,  are  a  surplus  over  and  above  the  expenses 
of  production.  There  are  two  ways  of  measuring  profits:  first, 
with  reference  to  some  unit  of  time,  such  as  a  year;  and,  second, 
with  reference  to  particular  units  of  product.  Thus,  when  a  manu- 
facturer speaks  of  his  profits  during  a  year,  he  has  in  mind  the 
difference  between  his  total  expenditures  and  total  receipts  for 
that  year.  But  when  he  speaks  of  his  profits  on  a  particular  sale, 
he  has  in  mind  the  difference  between  the  expense  of  producing 
the  particular  goods  sold  and  the  prices  received  for  them.  The 
two  ways  of  measuring  profits  are  not  alike,  because  a  large  part 
of  the  expenses  incurred  by  an  entrepreneur  in  any  given  year 
may  be  payments  for  work  done  in  connection  with  the  production 
of  goods  that  will  not  be  marketed  until  some  later  time.  In  the 
long  run,  however,  the  amount  of  annual  profits  will  be  determined 
by  the  profits  on  particular  transactions  or  on  particular  products, 
so  that  for  present  purposes  it  is  not  necessary  to  press  the  dis- 
tinction any  farther.  It  is  sometimes  more  convenient  to  use  the 
word  "  profits  "  in  one  sense,  and  sometimes  in  the  other  sense. 

Profits,  being  a  surplus,  do  not  constitute  a  homogeneous  in- 
come determined  by  any  one  principle  or  set  of  principles.  They 
are  the  resultant  of  all  the  forces  that  tend  to  bring  about  inequali- 
ties between  the  prices  paid  for  things  and  the  expenses  of  produc- 
ing them.  It  is  not  possible  in  a  brief  analysis  even  to  attempt  to 
break  up  this  mixed  form  of  income  into  all  of  its  constituent 
parts.  Attention  may  be  called,  however,  to  some  of  the  more 
important  and  obvious  elements  in  profits.  These  are:  entre- 

439 


440  OUTLINES   OF   ECONOMICS 

preneurs'  wages,  speculative  gains,  chance  gains,  and  gains  of 
bargaining. 

Entrepreneur's  Wage.  — This  element  in  profits  is  sometimes 
called  the  "  wages  of  management,"  and  constitutes  the  payment 
received  by  the  entrepreneur  for  his  services  as  manager  or  super- 
visor of  his  business.  It  is  not  easy  to  draw  a  line  between  this 
element  in  profits  and  wages.  In  fact,  "  entrepreneur's  wage  " 
could  be  discussed  just  as  appropriately  under  the  general  head 
of  wages  as  in  connection  with  the  general  subject  of  profits.  The 
only  distinguishing  things  about  this  particular  kind  of  wages  are 
that,  unless  the  entrepreneur  adopts  the  bookkeeping  form  of 
paying  wages  to  himself,  they  come  out  of  the  general  surplus  or 
residuum  commonly  called  profits  in  actual  business,  and  that  they 
are  the  wages  paid  for  a  particular  kind  of  labor.  The  average 
American  farmer  usually  does  a  certain  amount  of  work  himself 
that  might  be  done  by  hired  laborers,  and  so  far  as  his  income 
represents  the  amount  he  saves  by  doing  such  work  himself,  it  is 
to  be  regarded  as  ordinary  wages.  But  in  addition,  he  does  other 
work  of  a  more  purely  managerial  quality,  including  the  general 
direction  of  the  time  and  methods  of  tillage  and  harvesting,  the 
organization  of  the  working  force;  in  fact,  the  determination  of 
what  may  be  succinctly  described  as  the  general  coordination  of 
labor,  capital,  and  land.  The  reader  may  ask:  Could  not  this 
part  of  the  work  be  [turned  over  to  a  salaried  foreman  ?  Certainly, 
and  in  some  cases,  as  on  the  estates  of  so-called  "  gentlemen 
farmers,"  all  of  it.  In  fact,  the  amount  of  the  managerial  work 
actually  done  by  the  entrepreneur  himself  in  any  kind  of  under- 
taking is  a  variable  quantity,  depending  upon  the  extent  to  which 
managerial  authority  is  delegated  to  foremen,  superintendents, 
and  salaried  managers.  In  any  case  the  "  wages  of  management  " 
exist,  although  they  do  not  always  exist  as  "  entrepreneur's  wage," 
nor  do  they  always  constitute  a  part  of  profits. 

Even  in  cases  where  the  entrepreneur  is  in  all  respects  his  own 
manager  (which  is,  after  all,  the  most  frequent  case  in  a  host  of 
small  business  undertakings),  the  entrepreneur's  wage  constitutes 
a  kind  of  minimum  profits,  and  may  very  properly  be  added  to 
the  real  expenses  of  production.  Minimum  profits  are  necessary 


PROFITS  441 

profits,  the  profits  needed  to  induce  the  entrepreneur  to  continue 
his  productive  work.  In  many  cases  they  can  be  measured 
roughly  by  the  salary  which  the  entrepreneur  could  get  by  working 
for  some  one  else.  Some  men  would  prefer  to  be  their  own 
masters  even  at  a  smaller  income,  while  others  would  shrink  from 
the  responsibilities  of  independent  business  life,  even  if  a  larger 
income  were  attached  to  it,  so  this  method  of  measuring  minimum 
profits  is  only  approximate. 

Minimum  profits  will  vary  with  managerial  efficiency.  The 
more  efficient  farmer  will  get  a  larger  product  with  a  given  equip- 
ment of  land,  labor,  and  capital  than  will  the  less  efficient  farmer.1 
So  will  the  more  efficient  manufacturer.  Managerial  efficiency 
really  means  productive  efficiency,  and  differences  in  managerial 
efficiency  will  cause  corresponding  differences  in  minimum  profits. 

Speculative  Gains.  — Modern  business,  based  as  it  is  on  ex- 
change economy,  and  production  "  for  the  market,"  is  of  necessity 
speculative  in  character,  and  the  entrepreneur  is  of  necessity  a 
speculator.  A  speculator  is  a  man  who  buys  things  in  the  hope 
of  selling  them  later  at  a  higher  price,  or  who  sells  things  which 
he  does  not  own,  hoping  to  buy  them  at  a  lower  price.  The  en- 
trepreneur buys  labor,  capital,  and  land,  and  uses  them  in  the 
production  of  things  which  he  hopes  to  sell  for  more  than  the 
expenses  of  production.  The  farmer  who  decides  to  devote  more 
land  to  certain  crops  and  less  land  to  other  crops  than  he  did  in 
the  preceding  year  is  guided  mainly  by  his  estimate  of  the  prices 
which  the  different  crops  will  sell  for.  The  merchant  purchases 
his  stock  according  to  the  best  estimates  he  can  make  of  the  kind 
of  goods  he  will  find  customers  for.  Even  when  goods  are  sold 
before  they  are  produced,  as  when  a  contracter  agrees  to  build  a 
house  for  a  certain  price,  the  entrepreneur  still  runs  the  risk  that 

1  It  has  been  suggested  that  the  difference  between  the  product  of  the  better 
farmers  and  of  the  poorer  farmers  is  not  only  absolutely  but  relatively  greater  in 
the  case  of  good  land  than  in  the  case  of  poor  lands.  If  this  is  so,  it  helps  to  ex- 
plain the  observed  fact  that  the  best  farmers  generally  have  the  best  lands.  That 
is,  they  would  be  able  to  pay  a  higher  rent  or  a  higher  price  for  the  good  lands  than 
the  poor  farmers  could.  In  this  case  some  of  the  higher  efficiency  of  the  better 
farmers  might  result  in  higher  rents  rather  than  higher  profits.  (See  Taylor, 
Agricultural  Economics,  Chap.  IX.) 


442  OUTLINES   OF  ECONOMICS 

his  expenses  of  production  will  be  greater  than  the  price  agreed 
upon.  If  he  attempts  to  eliminate  the  element  of  uncertainty 
by  contracting  for  his  materials  in  advance,  he  simply  shifts  some 
of  the  risk  to  lumber  dealers,  hardware  merchants,  etc.,  while  he 
himself  still  assumes  some  risk,  although  of  a  different  kind. 
That  is,  he  guards  himself  against  possible  loss,  but  by  the  same 
process  he  gives  up  the  chance  of  the  higher  profits  he  would  have 
got  for  himself  if  the  prices  of  materials  had  been  lower  at  the 
actual  time  of  construction  than  they  were  when  he  made  the 
contract. 

This  element  of  risk  taking  is  the  very  essence  of  modern  busi- 
ness, and  the  most  successful  entrepreneurs  are,  in  general, 
those  who  are  the  most  successful  risk  takers.  Risk  taking,  in 
this  sense,  does  not  mean  a  blind  dependence  upon  chance.  If 
this  were  so,  there  would  be  no  reason  why  business  failure  should 
not  be  about  as  common  as  business  success.  Risk  taking  is 
nearly  synonymous  with  business  enterprise.  It  involves  careful 
estimates  of  the  amounts  of  product  that  can  be  got  from  different 
combinations  of  labor,  capital,  and  land,  and  equally  careful 
estimates  of  the  salability  of  such  products.  It  is  in  this  latter 
field,  which  involves  the  diagnosis  of  market  conditions  with  a 
view  to  ascertaining  their  probable  trend,  that  the  entrepreneur's 
skill  finds  its  chief  opportunity.  This  kind  of  skill  means  knowl- 
edge and  foresight  —  very  different  things  from  mere  willingness 
to  "  take  a  chance."  Yet,  though  the  efficient  entrepreneur  deals 
with  probabilities  rather  than  possibilities  in  his  estimates,  he  is 
nevertheless  a  risk  taker,  a  speculator,  for  his  estimates  have  to 
do  with  market  conditions  that  are  beyond  his  personal  control. 
While  his  success  may  be  probable,  it  is  very  far  from  being 
certain. 

The  functions  of  the  entrepreneur  as  a  risk  taker  are  clearly 
distinguishable  from  his  functions  as  a  manager.  Managerial 
efficiency,  as  we  have  seen,  is  the  ability  to  combine  and  direct 
labor,  capital,  and  land  in  such  a  way  as  to  get  the  maximum  prod- 
uct. Risk-taking  efficiency  means  the  ability  to  get  the  largest 
receipts  from  a  given  expenditure.  When  we  speak  of  managerial 
efficiency,  we  have  especially  in  mind  the  technical  side  of  produc- 


PROFITS 


443 


tion  —  the  manner  in  which  the  factors  in  production  are  utilized; 
risk-taking  efficiency  refers  to  the  value  side  of  production  —  the 
way  in  which  the  use  of  capital,  labor,  and  land  is  directed  into 
the  most  remunerative  channels.  Managerial  duties  may  be  dele- 
gated to  salaried  employees;  the  risk-taking  function  is  one  which 
the  entrepreneur  cannot  shift  to  another.1 

This  part  of  competitive  profits  is  in  its  very  nature  a  shifting 
and  even  transient  thing.  To  anticipate  consumers'  demands 
correctly  is  not  in  itself  a  guarantee  of  profits  to  any  entrepreneur. 
If  other  entrepreneurs  have  counted  on  the  same  demand,  it  may 
easily  happen  that  the  total  product  cannot  be  sold  at  a  profitable 
price.  In  fact,  the  "  market  conditions  "  which  the  entrepreneur 
has  to  forecast  include  the  conditions  of  supply  as  well  as  of  de- 
mand. But  even  in  case  a  given  entrepreneur  has  succeeded  in 
producing  the  precise  things  that  consumers  are  demanding  and 
that  other  entrepreneurs  are  not  producing,  and  has  thus  been  able 
to  get  large  profits,  he  cannot  count  on  their  permanence.  De- 
mand may  change,  but  even  if  demand  remains  constant  or  in- 
creases, his  large  profits  will  be  a  standing  invitation  to  other 
entrepreneurs  to  enter  the  same  field  —  a  condition  which  will 
continue  until  competition  forces  the  profits  of  this  particular 
kind  of  business  down  to  where  they  just  suffice  to  pay  the  wages 
of  management.  If  profits  in  any  establishment  or  any  industry 
go  below  this  minimum  point,  the  tendency  will  be  for  entrepre- 
neurs to  shift  their  investments  to  more  profitable  undertakings. 

The  kind  of  profits  which  we  are  now  discussing  constitute  the 
guiding  principle,  the  incentive,  in  modern  economic  life.  It  is 
the  desire  to  get  money  profits  that  leads  entrepreneurs  to  produce 
particular  things  and  to  produce  them  in  particular  ways.  It  is 
for  this  reason  that  old  channels  of  productive  effort  are  con- 
tinually being  abandoned  and  that  the  use  of  labor,  capital,  and 
land  is  continually  being  guided  into  new  channels.  The  shifting 

1  This  statement  may  seem  open  to  the  qualification  implied  in  the  fact  that  in 
some  cases  the  foresight  and  skill  utilized  are  those  of  employees  (the  "  buyers  " 
for  a  large  retail  store,  for  example).  Yet  while  the  entrepreneur  may  thus  depend 
in  part  upon  others'  knowledge  of  market  conditions,  the  risk  involved  is  neces- 
sarily assumed  by  himself. 


444  OUTLINES   OF  ECONOMICS 

of  productive  effort  which  the  pursuit  of  money  profits  involves 
consists,  for  the  most  part,  of  efforts  on  the  part  of  entrepreneurs 
to  meet  the  shifting  wants  of  consumers. 

One  of  the  strongest  arguments  for  the  superiority  of  the  competi- 
tive system  over  any  possible  substitute  for  it  lies  in  the  fact  that, 
under  competition,  the  guiding  of  production  into  the  channels 
indicated  by  the  search  for  money  profits  will  result  in  the  maxi- 
mum satisfaction  of  human  wants.  This  follows  from  the  fact 
that  the  prices  people  are  willing  to  pay  for  certain  commodities 
measure  the  importance  which  they  attach  to  the  possession  of 
those  commodities.  The  shifting  of  labor  and  capital  from  less 
profitable  to  more  profitable  uses  means,  in  general,  that  more 
intense  wants  will  be  satisfied  with  the  same  expenditure  of  pro- 
ductive energy.  All  this  is  implied  in  the  statement  made  above 
that  the  shifting  of  productive  effort  is  mainly  in  response  to  the 
shifting  wants  of  consumers.  This  argument,  that  under  free 
competition  the  pursuit  of  money  profits  leads  to  the  best  adapta- 
tion of  productive  efforts  to  the  satisfaction  of  the  wants  of  con- 
sumers, is  one  that  has  rarely  been  met  squarely  by  those  who 
attack  the  competitive  system.  There  are,  however,  several  im- 
portant considerations  that  lessen  to  some  extent  its  force. 

In  the  first  place,  the  extent  to  which  the  wants  of  any  individual 
affect  the  ordering  of  the  productive  processes  depends  upon  his 
purchasing  power,  that  is,  primarily,  upon  his  income.  It  is  mani- 
festly absurd  to  say  that  the  shifting  of  labor  and  capital  from  the 
production  of  necessities  for  the  poor  to  the  production  of  luxuries 
for  the  rich,  simply  because  it  may  be  more  profitable,  necessarily 
means  a  better  satisfaction  of  human  wants.  The  extent  to  which 
wants  are  satisfied  depends  on  the  way  wealth  is  distributed  as 
well  as  upon  the  amount  and  kinds  of  things  produced. 

Moreover,  even  granting  that  the  stimulus  of  money  profits 
leads  to  the  best  practicable  satisfaction  of  the  wants  of  present 
consumers,  this  may  sometimes  be  achieved  by  imposing  added 
difficulties  in  want-satisfaction  on  future  generations.  The  lines 
of  procedure  that  will  bring  maximum  profits  to  entrepreneurs 
sometimes  run  counter  to  the  more  permanent  interests  of  society. 
We  all  recognize,  for  example,  that  there  may  be  such  a  thing  as  a 


PROFITS 


445 


too  rapid  exploitation  of  natural  resources.  The  history  of  timber 
lands  in  America  furnishes  an  instructive  example. 

A  still  more  important  qualification  of  the  statement  that  com- 
petitive profit  seeking  works  for  the  best  interests  of  society, 
viewed  as  a  body  of  consumers,  is  found  in  the  fact  that  when  we 
begin  to  speak  of  the  interests  of  society,  we  introduce,  of  necessity, 
the  ethical  point  of  view.  This  means  that  we  must  consider  not 
only  the  quantity,  but  also  the  quality  of  want-satisfactions.  For 
purposes  of  the  economic  analysis  of  market  forces,  we  make  no 
distinction  between  different  kinds  of  utilities,  but  it  is  impossible 
to  discuss  social  well-being  without  taking  into  account  the  fact 
that  from  the  point  of  view  of  the  interests  of  society  some  kinds 
of  "  utilities  "  are  good  and  some  are  bad,  and  that  even  the  better 
kinds  of  want-satisfactions  vary  greatly  in  their  importance,  when 
measured  by  any  criterion  of  social  welfare.  The  production  of 
socially  undesirable  things,  such  as  intoxicating  liquors,  adulterated 
foods,  ill-ventilated  tenements,  etc.,  is  often  prohibited,  while,  on 
the  other  hand,  society  has  found  that  certain  socially  desirable 
things,  such  as  schools,  parks,  libraries,  clean  streets,  etc., 
will  not  be  supplied  at  all,  or  will  not  be  supplied  in  sufficient 
quantities  by  private  business  enterprise.  All  indications  point  to 
a  very  considerable  extension  of  organized  social  activity  at  pre- 
cisely those  points  where  the  private  pursuit  of  money  profits 
has  proven  itself  inadequate. 

Chance  Gains.  —  It  often  happens  that  an  entrepreneur  is  able 
to  get  profits  on  account  of  some  unforeseen  and  purely  fortuitous 
circumstances.  Such  profits  should  not  be  confused  with  the 
kind  that  have  just  been  discussed,  which  vary  with  the  foresight 
and  enterprise  of  the  entrepreneur.  Capricious  changes  in  fashion 
often  bring  temporarily  high  profits  to  dealers  who  happen  to  have 
the  right  kinds  of  goods  in  stock,  or  to  manufacturers  who  happen 
to  have  the  equipment  needed  to  produce  the  right  kinds  of  goods. 
American  farmers  have  profited  at  different  times  by  the  failure  of 
the  European  grain  crop.  Other  examples  will  suggest  themselves  to 
the  reader.  There  are  chance  losses  as  well  as  chance  gains,  and 
they  are  probably  quite  as  numerous  and  important.  Chance 
gains,  therefore,  do  not  constitute  any  important  part  of  the  income 


446  OUTLINES   OF  ECONOMICS 

going  to  entrepreneurs  as  a  class,  but  they  are  often  a  considerable 
element  in  the  profits  of  particular  entrepreneurs. 

Gains  of  Bargaining.  —  We  have  seen  in  other  connections  that 
the  prices  of  commodities  and  services  are  in  many  cases  fixed  only 
loosely  by  the  forces  of  supply  and  demand.  In  the  actual  process 
of  bargaining,  the  shrewder  party  to  the  bargain  may  very  often  sell 
for  more  than  his  minimum  selling  price,  or  buy  for  less  than  his 
maximum  buying  price.  Skillful  bargaining  swells  the  entrepreneur's 
profits,  first,  by  increasing  the  prices  he  gets  for  things,  and  second, 
by  decreasing  his  expenses  of  production.  We  have  seen  that  in 
bargaining  with  an  individual  laborer  the  entrepreneur  usually 
has  an  advantage  that  tends  to  increase  profits  at  the  expense 
of  wages  —  an  advantage  which  is  at  least  partly  lost  when  the 
laborers  resort  to  collective  bargaining.  In  bargaining  for  the  use 
of  capital  funds,  the  entrepreneur  is  apt  to  know  what  the  loan 
is  worth  to  him  better  than  the  lender  does;  but,  on  the  other  hand, 
it  often  happens  that  the  entrepreneur  is  put  at  a  disadvantage 
when  the  loan  is  a  matter  of  necessity  to  him,  but  relatively  a  matter 
of  indifference  to  the  lender. 

Non- competitive  Profits.  —  All  of  the  sources  of  profits  men- 
tioned above  are  based  on  circumstances  which  arise  in  the  course 
of  ordinary  competitive  business.  In  any  particular  case  their 
magnitude  depends  on  the  managing  ability,  foresight,  bargain- 
ing skill,  or  good  fortune  of  the  entrepreneur.  Moreover,  of  the 
tendency  of  competition  to  eliminate  all  but  minimum  profits, 
the  continuance  of  surplus  profits  is  only  achieved,  in  general, 
by  continued  endeavor  on  the  part  of  the  entrepreneur.  In  the 
case  of  monopoly,  however,  the  existence  of  profits  rests  upon  a 
very  different  ground  —  the  ability  of  the  monopolist  to  control 
the  supply.  This  results  normally,  as  we  have  seen,  in  a  fixing 
of  monopoly  price  at  the  point  that  will  yield  the  largest  net  profits. 
Monopoly  profits  are  not  only  apt  to  be  higher  than  competitive 
profits,  but  they  are  also  apt  to  be  more  stable  and  permanent  in 
character. 

It  very  often  happens  in  non-monopolistic  undertakings  that  the 
entrepreneur  who  has  developed  his  business  to  a  profitable  point 
is  able  to  attach  some  degree  of  permanency  to  his  profits.  A 


PROFITS  447 

merchant  often  relies  to  a  very  large  extent  upon  the  patronage 
of  an  established  clientele  of  customers,  and  in  turn  he  may  prefer, 
other  things  being  equal,  to  purchase  his  goods  from  particular 
wholesale  houses.  When  a  business  undertaking  is  sold  as  a 
whole,  its  established  connections  of  this  sort  enter  into  the  deter- 
mination of  the  price  paid  for  it,  under  the  head  of  "  good-will." 
This  "  good-will  "  element  is  generally  measured  by  the  difference 
between  the  valuation  of  a  business  establishment  and  the  valua- 
tion of  the  specific  assets  (minus  the  specific  liabilities)  of  the 
business.  In  the  sale  of  a  newspaper  it  often  happens  that  the 
"  good-will  "  of  the  enterprise  (its  established  advertising  and 
subscription  patronage)  is  the  only  thing  actually  transferred  by 
one  entrepreneur  to  the  other.  Those  more  or  less  definitely 
established  kinds  of  profits  which  give  rise  to  "  good -will  "  values 
must  not  be  confused  with  monopoly  profits.  Monopoly  implies 
the  absence  of  competition.  "  Good-will  "  profits  are  to  be  attrib- 
uted rather  to  the  imperfect  working  of  competition,  to  the  eco- 
nomic inertia  and  friction  which  result  from  the  fact  that  buyers 
are  guided  to  a  very  large  extent  by  custom  and  habit  rather  than 
by  conscious  choice.  Moreover,  in  many  small  transactions,  for  cus- 
tomers to  attempt  to  buy  always  at  the  lowest  price  would  result 
in  a  waste  of  time  and  energy  disproportionate  to  the  gain.  Hence, 
aside  from  the  influence  of  custom  and  habit,  there  may  often  be 
rational  ground  for  the  continued  patronage  of  particular  establish- 
ments which  customers  have  found  to  be  trustworthy. 

"  Good-will  "  is,  in  general,  of  most  importance  in  retail  estab- 
lishments, where  annual  profits  are  apt  to  be  made  up  of  the  specific 
profits  on  a  large  number  of  relatively  small  transactions.  In 
the  larger  transactions  of  wholesale,  jobbing,  and  manufacturing 
establishments,  the  element  of  "  good -will  "  is  not  entirely  absent, 
but  the  vigilance  of  expert  buyers  and  the  mere  size  of  the  ordinary 
transaction  (making  even  small  differences  in  prices  important) 
tend  to  reduce  it  to  a  minimum.  A  noteworthy  feature  of  modern 
business,  however,  is  the  attempt  on  the  part  of  manufacturers 
and  wholesalers  to  influence  the  demand  of  the  ultimate  consumers 
of  their  products  through  the  use  of  advertising.  The  trade-mark 
privilege,  which  enables  particular  brands  of  competitively  pro- 


448  OUTLINES   OF   ECONOMICS 

duced  goods  to  be  distinguished,  is  an  important  factor  in  the  efforts 
of  such  producers  to  gain  and  hold  the  patronage  of  the  ultimate 
consumers.  The  "  good-will  "  of  a  large  manufacturing  establish- 
ment thus  comes  to  be  in  some  cases  as  valuable  a  possession  as 
a  monopoly  franchise.  Farmers,  and  other  producers  of  standard 
kinds  and  classes  of  goods,  have  small  opportunity  to  acquire 
"  good -will  "  profits. 

The  Social  Dividend.  —  The  significance  of  the  statement  made 
in  an  earlier  chapter,  that  the  distribution  of  wealth  is  a  matter 
of  valuation,  should  now  be  clear  to  the  reader.  But  since  the 
detailed  character  of  the  analysis  may  make  a  broad  and  inclusive 
view  of  this  valuation  process  somewhat  difficult,  it  will  be  worth 
our  while  to  bring  together  the  more  important  conclusions  we 
have  reached,  and  to  try  to  see  them  from  a  somewhat  different 
point  of  view. 

The  social  dividend  is  made  up  of  the  scarce  and  valuable  things  (com- 
modities and  services)  that  are  of  direct  use  in  the  satisfaction  of  human  wants. 
The  process  by  which  the  claims  of  different  individuals  against  the  social 
dividend  are  adjudicated  is  the  process  of  the  distribution  of  wealth.  We 
have  seen  that  these  claims  rest  upon  various  grounds.  Some  men  give  of 
their  own  time  and  energy  to  the  production  of  goods.  Others  permit  the 
use  of  the  scarce  and  valuable  natural  agents  (especially  land)  which  they 
own.  Still  others  exchange  part  of  their  present  claims  against  the  social 
dividend  for  future  claims,  thereby  permitting  part  of  the  productive  work 
of  society  to  be  turned  toward  the  creation  of  indirect  goods,  the  use  of  which 
operates,  in  the  long  run,  to  greatly  increase  the  social  dividend. 

A  unifying  characteristic  of  these  three  different  kinds  of  claims  is  the  fact 
that  the  wages  of  labor,  the  rent  of  land,  and  the  interest  on  capital  are  simply 
different  forms  of  money  income,  paid  for  the  services  of  land,  labor,  and 
capital  in  the  production  of  valuable  things.  The  valuations  which  society 
puts  on  the  productive  services  of  its  members  or  of  their  productive  goods 
are  determined  through  the  activities  of  entrepreneurs. 

The  relation  of  the  activities  of  entrepreneurs  to  the  money  incomes  of  the 
members  of  society  is  twofold.  On  the  one  hand,  the  purchasing  power  of 
consumers  is  derived  from  their  money  incomes,  which  in  this  way  constitute 
the  means  by  which  the  demand  for  the  entrepreneur's  products  expresses 
itself.  On  the  other  hand,  the  money  incomes  received  by  laborers  and  by 
those  who  supply  capital  and  land  are  paid  by  entrepreneurs  in  return  for  pro- 
ductive services.  The  wages,  rent,  and  interest  expended  by  any  one  entre- 
preneur for  these  productive  services  are  in  turn  paid  over  by  the  individuals 
who  receive  them  to  other  entrepreneurs  in  return  for  their  products.  There 


PROFITS  449 

is  thus  a  continuous  flow  of  money  income  through  the  hands  of  entrepre- 
neurs, appearing  first  in  the  form  of  the  prices  that  are  paid  for  an  entre- 
preneur's goods,  then  emerging  in  the  form  of  the  rent,  wages,  and  interest 
that  the  entrepreneur  pays  for  the  service  of  the  factors  in  production,  then 
reappearing  in  the  prices  paid  for  other  goods,  and  so  on  in  a  continually 
recurring  cycle  of  income  and  outgo.1 

This  process  is  made  more  complicated,  however,  by  the  fact  that  not  all  of 
the  entrepreneur's  expenses  appear  directly  as  rent,  wages,  or  interest.  A  con- 
siderable part,  and  in  many  cases  (as  in  mercantile  establishments),  the  largest 
part  of  such  expenditures  are  for  various  concrete  forms  of  capital,  —  raw 
materials,  dealers'  stocks  of  goods,  machines,  and  the  like.  Here  a  part  of 
the  money  income  received  by  the  entrepreneur  in  the  form  of  the  prices  paid 
for  his  own  goods  emerges  in  the  prices  which  he  pays  for  the  goods  sold  by 
other  entrepreneurs,  and  which,  in  turn,  make  up  a  part  of  their  money  in- 
comes. But  this  other  class  of  entrepreneurs  —  who  supply  capital  goods 
rather  than  consumption  goods  —  are  subject  to  the  same  necessity  of  ex- 
pending their  money  incomes  in  the  payment  of  wages,  rent,  and  interest, 
and  in  the  purchase  of  different  kinds  of  capital  goods.  To  push  the  analysis 
still  further  would  obviously  lead  us  only  into  needless  repetition.  One 
important  fact,  however,  appears  clearly :  If  we  could  trace  the  expense  of 
producing  any  consumption  good  back  through  all  the  long  series  of  services 
and  of  production  goods  that  have  contributed  to  its  making  we  would  find 
that  this  expense  reduces  itself,  ultimately,  to  rent,  wages,  and  interest, 
not  counting  what  remains  in  the  entrepreneur's  hands  as  profits.  Part 
of  the  "flow  of  money  income"  passes  through  the  hands  of  a  chain  of 
entrepreneurs,  but  it  nevertheless  originates  in  the  prices  that  consumers 
pay  for  the  things  that  satisfy  their  wants  and  emerges  in  the  form  of  the  pay- 
ments made  for  the  productive  services  of  land,  labor,  and  capital. 

Yet  another  correction  must  be  made,  however,  to  fit  this  picture  of  part 
of  the  economic  process  more  closely  to  the  facts.  The  money  which  con- 
sumers pay  for  particular  commodities  does  not  usually  constitute  the  actual 
fund  with  which  the  entrepreneur  pays  for  the  labor,  the  land,  and  the  capital 
goods  used  in  the  production  of  those  commodities.  Still  less  does  it  con- 
stitute the  actual  fund  from  which  the  entrepreneurs  who  supply  the  neces- 
sary capital  goods  pay  their  expenses,  or  from  which  the  expenses  of  still 
more  remote  stages  in  the  process  of  production  are  paid.  The  roundabout, 
indirect  methods  which  characterize  modern  production,  and  which  in- 
volve the  division  of  the  productive  process  among  countless  different  under- 
takings, take  time.  The  goods  which  consumers  buy  to-day  are  the  result  of 
a  long  series  of  productive  efforts  extending  back  indefinitely  into  the  past. 
Similarly  the  productive  efforts  of  to-day  avail  but  relatively  little  toward  the 

1  To  a  very  large  extent,  this  "flow  of  money  income"  does  not  take  the  form 
of  the  actual  circulation  of  concrete  forms  of  money.     For  the  most  part  it  takes 
place  through  the  creation  and  cancellation  of  credit  obligations. 
2  G 


450  OUTLINES   OF  ECONOMICS 

satisfaction  of  present  wants,  for  they  are  in  large  part  directed  to  forwarding, 
often  in  the  most  indirect  ways,  the  production  of  things  that  will  come  to  a 
final  fruition  in  the  satisfaction  of  human  wants  only  in  the  more  or  less  re- 
mote future. 

Viewed  in  this  way  the  annual  product  of  society  is  something  very  different 
from  the  social  dividend.  The  year's  work  is  begun  with  an  equipment  of 
economic  goods  of  all  kinds,  —  finished  goods  in  the  hands  of  dealers  and 
manufacturers,  goods  in  all  stages  of  completion,  growing  crops,  factory  and 
mercantile  buildings,  machines,  and  all  the  auxiliary  apparatus  of  production 
in  a  finished  or  unfinished  state.  The  annual  product  includes  all  the  ad- 
ditions made  to  this  stock  of  goods,  and  all  that  is  accomplished  in  forwarding 
such  goods  as  are  destined  for  human  consumption  towards  the  form,  place, 
and  time  in  which  and  at  which  they  are  wanted.  It  includes  all  that  is 
done  in  a  similar  way  to  forward,  replenish,  and  increase  the  stock  of  pro- 
duction goods.  It  includes  also  all  the  personal  services  that  command  a 
money  payment  which  are  not  embodied  in  concrete  goods,  but  which  con- 
fer their  benefits  in  the  very  instance  of  their  performance. 

But  while  the  productive  efforts  of  society  are  thus  constantly  building  up 
and  modifying  the  stock  of  economic  goods,  this  stock  is  continually  being 
depleted  in  various  ways.  The  instruments  of  production  are  constantly 
wearing  out,  or  are  being  cast  aside  on  account  of  the  introduction  of  either 
more  efficient  appliances  or  more  efficient  methods  which  utilize  other  kinds 
of  appliances.  Then,  too,  as  the  final  outcome  of  this  productive  process 
there  is  a  constant  stream  of  finished  consumption  goods  passing  into  the 
hands  of  consumers.  The  social  dividend  consists  of  this  flow  of  consumption 
goods,  together  with  those  direct  personal  services  which  do  not  have  to  do 
directly  or  indirectly  with  the  fitting  of  goods  for  human  consumption,  but 
which  nevertheless  satisfy  wants  and  command  a  money  payment.  While 
the  social  dividend  is  to  a  large  extent  the  outcome  of  past  work  and  effort, 
the  annual  product  is  very  largely  a  provision  for  future  wants. 

What  is  the  effect  of  all  these  considerations  upon  our  analysis  of  the  flow 
of  money  income?  It  still  remains  true  that  the  money  which  consumers 
pay  to  entrepreneurs  is  in  turn  used  by  them  in  the  payment  of  their  expenses 
of  production,  and  that  the  money  which  they  in  turn  pay  to  other  entrepre- 
neurs for  various  forms  of  capital  goods  are  used  in  the  payment  of  expenses 
of  production.  But  the  prices  consumers  are  paying  are  for  goods,  the  ex- 
penses of  producing  which  have  (at  least  in  greater  part)  already  been  paid, 
and  some  of  them  (such  as  the  prices  paid  for  some  kinds  of  capital  instru- 
ments) may  have  been  paid  some  considerable  period  of  time  back  in  the 
past.  If  in  turn  we  should  trace  back  the  expenses  of  producing  the  capital 
goods  used  in  producing  these  consumption  goods  our  search  would  lead  us 
into  the  more  remote  past,  while  still  further  analysis  of  the  expenses  of  pro- 
duction would  discover  an  increasing  number  of  ramifications  running  back 
into  the  still  more  distant  past.  The  present  flow  of  money  income,  original 


PROFITS  451 

ing  in  the  prices  paid  by  consumers,  passes,  as  we  have  seen,  through  the 
hands  of  a  chain  of  entrepreneurs  and  in  this  process  gets  ultimately  into  the 
hands  of  laborers,  capitalists,  and  landlords.  But  most  of  the  productive 
services  which  are  thus  remunerated  are  services  which  will  avail  toward  the 
satisfaction  of  future  rather  than  of  present  wants.  In  other  words,  the 
prices  paid  for  consumers'  shares  in  the  social  dividend  constitute  (save  for 
an  important  exception  to  be  noted  presently)  the  fund  which  pays  for  the 
annual  product.  The  productive  efforts  of  the  past,  which  satisfy  the  wants 
of  to-day,  were  paid  for  out  of  past  income,  while  the  present  work  of  producing 
goods  that  will  be  ripe  for  consumption  only  in  the  future  is  paid  for  out  of 
present  income.  In  this  fact  lies  the  explanation  of  the  nature  and  necessity 
of  one  of  the  various  kinds  of  claims  against  the  social  dividend  —  interest. 

The  outlays  which  entrepreneurs  make  in  producing  goods,  so  far  as 
they  are  paid  before  they  receive  an  income  from  the  sale  of  the  goods, 
are  commonly  called  investments  of  capital.  Not  only,  as  we  have  seen, 
does  the  entrepreneur  invest  capital  in  production  goods  such  as  machines 
and  buildings,  but  his  purchases  of  raw  materials,  his  advances  of  wages 
to  laborers,  the  interest  which  he  pays  on  borrowed  capital,  and  the  rent  or 
the  purchase  price  which  he  pays  for  land,  are  usually  investments  of  capi- 
tal. No  such  investments  can  be  regarded  as  remunerative  unless  the 
entrepreneur  gets  in  the  selling  prices  of  his  products  enough  to  provide 
interest  upon  such  outlays  as  well  as  to  cover  the  outlays  themselves. 
These  facts  were  noted  in  connection  with  the  discussion  of  interest  in  an 
earlier  chapter,  but  there,  for  simplicity's  sake,  the  analysis  was  confined  to 
the  capital  expenditures  of  the  individual  entrepreneur.  The  full  signifi- 
cance of  the  r61e  which  capital  plays  in  production  does  not  appear  until 
we  view  the  activities  of  the  individual  entrepreneur  as  only  a  link  in  the 
continuous  chain  of  activities  that  make  up  the  productive  process. 

The  point  of  special  significance  in  this  connection  is  the  fact  that  the 
finished  products  sold  by  some  entrepreneurs  constitute  the  capital  goods 
(raw  materials,  productive  appliances,  etc.)  bought  by  other  entrepreneurs. 
When  one  entrepreneur  sells  his  products  to  another  entrepreneur  his  period 
of  "waiting"  is  completed,  so  far  as  his  advances  of  capital  funds  in  the  pro- 
duction of  these  particular  units  of  goods  are  concerned.  But  the  "waiting" 
is  only  transferred  to  the  other  entrepreneur,  who  adds  further  expenditures 
of  capital  and,  in  turn,  gets  his  remuneration  from  the  sale  of  his  product. 
The  important  conclusion  to  which  this  analysis  leads  is  that  (so  far  as  the 
entrepreneurs  have  been  accurate  in  their  estimates)  the  prices  which  con- 
sumers are  paying  to-day  for  finished  goods  cover  not  only  all  the  actual  money 
expenditures  which  have  been  made  in  the  past  in  the  production  of  these 
goods,  but  also  the  interest  on  all  such  expenditures  from  the  time  they  were 
made  up  to  the  time  of  the  sale  of  the  finished  goods  to  the  ultimate  consumer. 

Similarly  the  expenditures  made  by  entrepreneurs  to-day  in  the  production 
of  goods  that  will  directly  or  indirectly  satisfy  future  wants  will  (so  far  as 


452  OUTLINES   OF   ECONOMICS 

these  entrepreneurs  and  those  who  will  control  the  remaining  steps  in  the 
productive  process  are  accurate  in  their  estimates)  be  covered,  together 
with  accrued  interest,  by  the  prices  which  consumers  will  pay  in  the  future. 
Present  wants  are  satisfied  by  means  of  the  productive  efforts  of  the  past. 
These  productive  efforts  were  paid  for  out  of  past  income,  but  the  outlays 
were  made  in  the  expectation  that  present  prices  would  suffice  to  repay  them, 
with  interest.  A  particular  entrepreneur  may  be  interested  only  in  disposing 
of  his  products  at  remunerative  prices  to  the  entrepreneurs  who  stand  next 
to  him  in  the  productive  series,  but  this  does  not  alter  the  essential  nature  of 
capital  investment,  which,  from  the  social  point  of  view,  is  a  cumulative  pro- 
cess. 

The  flow  of  money  income  which  originates  in  the  prices  consumers  pay 
to  the  entrepreneurs  with  whom  they  deal  emerges  in  the  form  of  capital 
expenditures,  and  so  far  as  these  take  the  form  of  the  purchase  of  capita) 
goods  they  constitute  the  fund  from  which  other  capital  expenditures  are 
made  by  other  entrepreneurs.  The  gross  money  income  of  entrepreneurs, 
then,  furnishes  by  far  the  most  important  part  of  the  current  supply  of  capital 
funds,  and  the  most  important  form  of  capital  investment  is  the  entrepreneur's 
customary  practice  of  "putting  money  back  into  the  business."  That  this 
way  of  investing  capital  is  customary,  even  habitual,  does  not  mean  that  the 
amount  as  well  as  the  particular  forms  of  such  investments  is  not  a  matter 
subject  to  the  discretion  of  the  entrepreneur.  So  far  as  the  entrepreneur 
is  not  hampered  by  contracts  (with  customers,  other  entrepreneurs,  money 
lenders,  landlords,  or  laborers)  he  is  free  to  do  as  he  pleases  with  his  income. 
As  a  matter  of  fact  he  is  apt  to  devote  a  fairly  constant  proportion  of  it  to  the 
replacement  of  the  capital  goods  that  are  being  used  up  or  worn  out  and  to  the 
other  necessary  expenses  of  continued  production. 

It  rarely  happens,  however,  in  any  undertaking,  that  income  and  ex- 
penditure are  so  nicely  adjusted  and  so  evenly  distributed  through  the  year 
that  the  one  always  suffices  to  provide  for  the  other.  A  temporary  surplus 
may  be  followed  by  a  temporary  deficit.  Transfers  of  goods  on  credit  smooth 
over  some  of  these  irregularities,  while  the  institution  of  banking  provides 
a  mechanism  whereby  the  temporary  surpluses  of  some  entrepreneurs 
are  made  use  of  in  meeting  the  temporary  deficits  of  others.  Moreover, 
while  the  entrepreneur  need  not  continue  to  renew  his  capital  investments 
unless  he  chooses,  he  is  at  liberty  to  do  even  more  than  this  if  he  deems  it 
advisable.  That  is,  his  profits  —  the  excess  of  his  gross  income  over  and 
above  his  current  and  normal  capital  expenditures  —  may  be  used  for  ad- 
ditional capital  expenditures. 

Still  another  source  of  capital  funds  is  found  in  the  rent,  wages,  and  interest 
into  which,  as  we  have  seen,  the  expenses  of  production  ultimately  resolve 
themselves.  For  so  far  as  these  forms  of  income  are  saved,  rather  than  ex- 
pended immediately  for  consumption  goods,  they  may  be  loaned  directly 
or  through  savings  institutions  to  entrepreneurs  for  productive  employment. 


PROFITS  453 

This  is  the  important  exception,  previously  mentioned,  to  the  statement 
that  "  the  prices  paid  for  consumers'  shares  in  the  social  dividend  constitute 
the  fund  which  pays  for  the  annual  product."  The  truth  is  that  as  the  flow 
of  money  income  passes  from  entrepreneur  to  entrepreneur,  a  part  only, 
although  the  larger  part,  is  put  into  productive  expenditures.  The  residuum 
is  used  by  entrepreneurs  in  paying  for  their  own  shares  in  the  social  dividend. 
In  much  the  same  way  the  money  incomes  received  by  those  who  furnish 
labor,  land,  or  capital  is  only  in  part  paid  back  to  entrepreneurs  in  return  for 
consumption  goods,  the  residuum  being  put  (through  loans  to  entrepreneurs) 
into  productive  expenditures. 

It  will  be  seen,  then,  that  as  the  flow  of  money  income  passes  through  the 
hands  of  entrepreneurs,  laborers,  capitalists,  and  landowners,  it  is  divided 
into  two  streams,  one  of  which  goes  to  pay  for  the  present  goods  that  have 
been  produced  in  the  past,  while  the  other  goes  to  pay  for  the  present  expenses 
of  forwarding  the  production  of  goods  for  future  consumption.  This  division 
represents  a  kind  of  social  balancing  of  possible  present  satisfactions  over 
against  the  larger  future  satisfactions  which  the  productive  use  of  capital 
makes  possible.  On  the  one  hand  we  have  the  entrepreneurs'  estimates  of 
how  much  specific  amounts  of  capital  funds  are  worth  to  them,  — estimates 
which  involve  judgments  as  to  the  amount  of  product  dependent  upon  the 
use  of  these  specific  amounts  of  capital  funds,  the  prices  that  can  be  got  for 
such  products,  and  the  period  of  time  that  will  elapse  before  they  will  be  re- 
munerated for  such  investments.  On  the  other  hand  we  have  the  estimates 
of  those  who  supply  capital  funds  as  to  the  relative  importance  of  future 
and  present  wants.  The  interest  rate  will  normally  be  fixed,  of  course, 
at  a  point  where  the  supply  and  demand  of  money  capital  will  be  in  equi- 
librium. 

In  dividing  his  capital  expenses  between  labor,  land,  and  capital  goods 
the  entrepreneur  will  again  be  influenced  by  his  estimates  of  how  much  the 
use  of  specific  quantities  of  each  of  these  factors  in  production  will  add  to  his 
money  income.  Here  he  has  to  reckon  with  the  fact  of  diminishing  produc- 
tivity. He  can  get  the  same  amount  of  product  from  different  combinations 
of  land,  capital  goods,  and  labor,  but  the  larger  the  proportion  of  his  expendi- 
tures he  devotes  to  any  one  of  these  things  (labor,  for  example),  the  smaller 
will  be  the  increment  of  product  dependent  upon  any  one  unit  of  it  (any  one 
laborer,  for  example).  The  most  economical  combination  of  labor,  capital 
goods,  and  land  is  reached,  of  course,  when  the  marginal  expenditures  for 
each  add  equal  quantities  to  his  product.  All  this,  however,  was  discussed 
in  detail  when  the  activities  of  the  individual  entrepreneur  were  taken  as 
the  point  of  departure  for  the  analysis  of  distribution  in  an  earlier  chapter. 
When  we  take  the  social  point  of  view,  so  that  production  is  made  to  appear 
as  a  cumulative  process  of  capital  investment,  the  expenses  for  capital  goods 
become  reduced  to  the  more  fundamental  expenditures  of  rent,  wages,  and 
interest,  involved  in  the  production  of  such  goods.  In  this  view  capital  goods 


454  OUTLINES   OF  ECONOMICS 

might,  by  a  legitimate  figure  of  speech,  be  said  to  be  embodied  rent,  wages, 
and  interest. 

The  social  process  of  production  involves  the  expenditure  of  rent,  wages, 
and  interest  for  returns  of  all  possible  degrees  of  futurity,  and  a  consequent 
comparison  and  balancing  of  the  productivity  of  investments  for  shorter  and 
longer  periods  of  time.  That  is,  social  estimates  of  productivity  are  estimates 
of  the  value  of  the  amounts  of  the  ultimate  products,  realizable  at  different 
periods  of  time  in  the  future,  that  are  dependent  upon  specific  present  ex- 
penditures in  the  form  of  rent,  wages,  or  interest.  Or,  in  other  words, 
there  is  a  continuous  effort  to  make  the  most  profitable  of  all  the  various 
possible  combinations  of  land,  labor,  and  waiting.  For  just  as  rent,  wages, 
and  interest  are  the  ultimate  expenses  of  production,  so  the  ultimate  factors 
in  production  may  be  said  to  be  land,  labor,  and  waiting. 

The  money  incomes  which  individual  laborers,  landlords,  and  capitalists 
receive,  and  which  constitute  the  claims  (or,  more  accurately,  the  potential 
claims)  against  the  social  dividend,  are  determined  by  this  social  estimate  of 
the  specific  amounts  which  they  add  to  the  value  of  the  annual  product,  or, 
ultimately,  to  the  value  of  finished  products.  Here  again,  on  account  of 
the  law  of  diminishing  productivity,  the  marginal  product  of  land,  labor,  or 
waiting  is  the  measure  of  the  specific  product  attributed  to  a  unit  of  land, 
labor,  or  waiting. 

It  must  be  remembered,  however,  that  marginal  productivity  does  not 
depend  alone  on  the  technical  efficiency  of  labor,  the  fertility  and  accessi- 
bility of  land,  and  the  greater  technical  or  physical  productivity  of  the 
roundabout,  indirect  methods  which  waiting  makes  possible.1  It  also 
depends,  just  as  fundamentally,  upon  the  amount  and  elasticity  of  the  supply 
of  land,  labor,  and  waiting.  It  has  been  shown  in  earlier  chapters  that  the 
conditions  of  supply  are  very  different  in  the  case  of  each  of  the  three  factors 
in  production.  No  account  of  the  distributive  process  can  be  complete  that 
does  not  lay  special  stress  on  these  differences,  for  these  are  the  things  that 
become  of  most  importance  when  economic  theory  is  utilized  in  the  untan- 
gling of  the  practical  social  problems  growing  out  of  the  distribution  of  wealth. 

Moreover,  we  cannot  insist  too  strongly  that  the  statement  of  the  tendency 
toward  an  equality  of  the  specific  product  attributable  to  a  unit  of  land, 
labor,  or  capital  funds  and  the  price  paid  for  its  use  is,  after  all,  only  an 
illuminating  way  of  stating  the  real  problem  of  distribution.  Just  as  marginal 

1  Whether  roundabout,  indirect  methods  of  production  are  inherently  more 
efficient  (that  is,  whether  they  necessarily  yield  a  larger  product  with  the  use  of 
a  given  amount  of  labor  and  land)  has  been  recently  a  matter  of  debate  among 
economic  writers.  The  fact  that  a  process  is  roundabout  does  not  in  itself  make 
it  more  economical.  But  that  many  roundabout  processes  are  economical  is  proved 
by  the  simple  fact  that  entrepreneurs  find  it  profitable  to  use  them.  This  fact 
is  all  that  is  needed  to  establish  the  importance  of  the  greater  technical  produc- 
tivity of  indirect,  time  using  methods  of  production  for  the  theory  of  interest. 


PROFITS  455 

utility  is  at  the  same  time  the  cause  and  effect  of  price,  so  marginal  produc- 
tivity is  at  the  same  time  the  cause  and  effect  of  wages,  rent,  and  interest. 
From  one  point  of  view  it  is  seen  that  the  competition  of  producers  makes 
it  necessary  that  specific  units  of  land,  labor,  and  capital  should  get  a  reward 
proportionate  to  the  value  of  the  amounts  which  they  contribute  to  the  social 
dividend;  from  another  point  of  view  it  is  equally  clear  that  the  necessary 
expenditures  for  land,  labor,  and  capital  are,  in  the  long  run,  potent  factors 
in  determining  the  value  of  the  things  that  make  up  the  social  dividend. 

Furthermore,  we  are  apt  to  forget  that  the  word  "productivity"  as  used  in 
economics  (and  generally  in  current  discussions  of  economic  topics)  has  a 
distinctly  limited  meaning.  To  digress  for  a  moment  in  order  to  make  the 
point  clearer :  In  the  theory  of  consumption  we  emphasize  the  fact  that 
many  of  the  most  important  human  wants  are  satisfied  by  "free  goods," 
which,  simply  because  they  are  free,  lie  outside  the  proper  field  of  economic  * 
investigation.  But  the  enjoyment  of  these  free  goods  is  usually  dependent 
upon  the  possession  of  economic  goods.  Air  is  a  free  good,  —  to  any  one 
who  can  demand  the  economic  goods  necessary  to  life.  The  glorious  scenery 
of  the  Alps  is  a  free  good,  —  to  any  one  who  can  afford  traveling  expenses 
and  hotel  bills.  In  general,  the  enjoyment  of  many  of  the  finer  pleasures 
of  life,  involved  in  the  common  human  relations  of  an  individual  to  his  physical 
and  social  environment,  are  "free,"  but  free  only  to  the  individual  who  can 
afford  the  leisure  and  the  economic  goods  without  which  many  of  these 
"free"  pleasures  are  impossible. 

For  present  purposes,  however,  the  important  point  is  that  there  are  free 
production  goods  as  well  as  free  consumption  goods.  Nature  furnishes  some 
of  these.  The  oceans  and  lakes  furnish  free  pathways  for  commerce ;  natural 
forces  of  all  kinds  are  freely  utilized  by  men  in  the  work  of  production.  As 
was  pointed  out  in  an  earlier  chapter,  we  do  not  call  these  things  productive, 
because  no  part  of  the  annual  product  is  dependent  on  the  utilization  of  any 
particular  unit  of  them.  In  this  technical  sense  the  wind  is  not  productive, 
but  win  dmills  are.  In  order  to  utilize  the  ocean  we  have  to  invest  capital 
in  vessels  and  docks.  We  have  to  impute  productivity  to  these  things  be- 
cause they  will  not  be  furnished  unless  it  is  estimated  that  they  will  yield  a 
remunerative  income,  and  because  the  annual  product  will  obviously  be 
reduced  if  they  are  not  furnished.  But  we  would  have  to  impute  productivity 
to  the  Strait  of  Gibraltar  if  England  were  able  to  charge  a  toll  for  its  use  ! 

Somewhat  analogous  to  these  "free  productive  goods"  is  society's  fund 
of  accumulated  knowledge  of  productive  methods,  —  the  heritage  of  centuries  •" 
of  economic  evolution.  This  accumulated  industrial  experience  is  an  in- 
finitely more  precious  possession  than  the  existing  store  of  productive  goods. 
Compare  the  productive  possibilities  of  a  community  of  men  possessing  this 
knowledge,  but  forced  to  begin  work  absolutely  without  a  ready-made  stock 
of  capital  goods,  with  those  of  a  tribe  of  savages  suddenly  and  miraculously 
equipped  with  all  the  productive  appliances  of  modern  civilization.  Yet  this 


456  OUTLINES    OF   ECONOMICS 

vast  fund  of  productive  knowledge,  so  far  as  it  is  common  property,  is  not 
thought  of  as  "productive."  The  social  dividend  is  continually  being  in- 
creased as  a  result  of  the  discovery  of  new  natural  forces,  or  new  ways  of 
harnessing  and  utilizing  natural  forces.  Secrecy  or  government  patents  make 
it  possible  for  those  who  first  introduce  these  new  methods  of  production  to 
reap  an  income  from  the  temporary  advantage  it  gives  to  them  as  producers. 
For  the  time  being  these  new  methods  themselves  have  to  be  regarded  as 
"productive,"  although  they  contribute  much  more  to  the  increase  of  the 
social  dividend  after  they  have  become  matters  of  common  knowledge  and 
use,  and  hence  have  ceased  to  be  called  "  productive."  *  Disinterested  scien- 
tists, especially  those  in  the  employment  of  the  government  or  of  universities, 
have  often  given  the  results  of  their  improvements  in  industrial  methods 
freely  to  the  world,  thereby  swelling  the  social  dividend,  but  not  reaping 
for  themselves  the  pecuniary  reward  which  goes  to  those  who  patent  their 
improvements  and  thereby  render  them  "productive."  Moreover,  many  of 
the  world's  greatest  advances  in  the  technique  of  production  have  been 
made  possible  only  by  the  patient  researches  of  investigators  in  the  "  unpro- 
ductive" field  of  pure  science,  working  solely  for  love  of  the  work,  and  with- 
out hope  of  pecuniary  reward.2 

We  impute  productivity,  in  the  technical  economic  sense,  only  to  goods  or 
services  which  are  the  objects  of  property  rights  or  of  analogous  rights  of  con- 
trol, —  such  as  a  man's  power  to  dispose  of  his  own  labor.  The  fact  is  that 
just  as  the  benefits  of  free  consumption  goods  are  bound  up  with  the  posses- 
sion of  larger  or  smaller  quantities  of  economic  goods,  so  the  utilization  of 
free  productive  agencies  is  possible  only  in  combination  with  labor,  waiting, 
and  scarce  and  appropriable  natural  objects,  —  and  these  have  to  be  paid  for. 
We  harness  natural  forces  for  the  work  of  production,  but  we  impute  prod- 
uctivity only  to  the  harness.  We  continually  learn  better  and  better  methods 
of  doing  our  productive  work,  but  we  impute  productivity  only  to  the  ex- 
penses involved  in  utilizing  these  methods,  —  not  to  the  methods  themselves. 

It  is  important  that  the  reader  should  see  the  truth  in  the  statement  that 
the  laborer,  the  landlord,  and  the  capitalist  get  paid  in  proportion  to  their 
respective  products.  It  is  equally  important  that  he  should  see  clearly  that 
there  are  definite  limitations  to  the  meaning  and  significance  of  the  statement. 

QUESTIONS 

i.  Is  there  a  sense  in  which  speculative  profits  can  be  said  to  be  a  reward 
for  productive  services?  If  so,  should  they  be  counted  among  the  expenses 
of  production? 

1  The  discussion  of  the  social  dividend  in  the  preceding  page  relates  only  to 
"  normal "  or  purely  competitive  production  and  distribution,  and  no  account 
has  been  taken  of  the  "productivity"  of  monopoly  rights. 

*  See  a  note  on  this  point  in  Merz,  History  of  European  Thought  in  the  Nine- 
teenth Century,  Vol.  I,  p.  92.  The  list  there  given  could  be  greatly  extended. 


PROFITS 


457 


2.  Is  good- will  capital? 

3.  Analyze  the  effect  of  an  increase  of  expenditures  for  present  goods  upon 
present  and  future  social  dividends. 

4.  If  money  wages  could  be  suddenly  increased  10  per  cent  would  there 
be  a  corresponding  increase  in  real  wages  ? 

5.  Monopolists  sometimes   curtail   their  output  in  order  to  increase  its 
total  value.     Should  this  be  called  productive? 

REFERENCES 

CARVER,  T.  N.     Distribution  of  Wealth,  Chap.  VII. 

MARSHALL,  ALFRED.     Principles  of  Economics,  4th  ed.,  Book  VI,  Chaps. 

VII  and  VIII. 

HAWLEY,  F.  B.     Enterprise  and  tfte  Productive  Process. 
TAUSSIG,  F.  W.     Wages  and  Capital,  especially  Chap.  III. 
VEBLEN,  THORSTEIN.     Theory  of  Business  Enterprise,  Chap.  III. 


PART  VI 
THE  RELATION  OF  THE  STATE   TO  INDUSTRY 

CHAPTER    XXVI 
NECESSITY    OF   STATE    ACTIVITY 

The  State  and  the  Meaning  of  State  Activity.  —  Without  going 
into  the  question  of  what  constitutes  a  State,  it  will  answer  our 
purpose  here  to  notice  the  extent  of  the  conception  as  we  use  it. 
We  in  the  United  States  are  familiar  with  many  kinds  of  govern- 
ment. When  we  speak  of  "  the  government,"  we  generally  mean 
the  federal  government,  with  its  seat  at  Washington.  Then  comes 
the  state  government,  then  the  city,  the  county,  the  township, 
and  the  school  district.  Each  of  these  has  its  own  governing  to 
do,  and  is  backed  up  in  the  doing  of  it  by  all  the  governments 
superior  to  it.  Now,  it  is  entirely  an  accident  with  us  that  out  of 
these  half  dozen  forms  of  government  only  one,  and  that  not  the 
highest,  is  known  as  the  state.  In  most  countries  the  govern- 
mental divisions  most  nearly  corresponding  to  our  states  are  known 
by  some  other  name  —  departments,  provinces,  etc.  When  we 
use  the  term  in  the  present  work  we  never  mean  a  state  in  our 
American  sense  unless  that  meaning  is  specified,  but  any  society 
acting  through  government.  Local  governments  are,  of  course, 
only  branches  of  the  main  government.  So,  when  a  school  district 
hires  a  school-teacher,  or  a  township  mends  a  road,  or  a  city  builds 
waterworks,  or  a  "  state  "  builds  a  penitentiary,  or  the  federal 
government  builds  a  post  office,  all  these  are  State  activities  in  the 
scientific  sense  of  the  word.  So,  too,  when  we  speak  of  State 
intervention  we  may  be  talking  about  the  township  or  the  city 
or  the  general  government.  These  are  only  different  ways  of 

458 


NECESSITY  OF  STATE  ACTIVITY  459 

exercising  one  and  the  same  kind  of  power  —  that  of  organized 
government. 

State  and  Government.  —  We  use  the  word  "  State  "  then,  in 
its  generic  sense.  The  term  "  governmental  activity  "  is  some- 
times employed  but  it  is  less  desirable.  The  word  "government" 
suggests  to  the  ordinary  mind  a  power  apart  from  and  superior 
to  the  people  —  a  restraining,  repressing,  punishing  power; 
whereas  the  modern  concept  of  the  State  is  that  of  a  cooperative 
institution.  To  those  not  still  bound  by  eighteenth  century  tra- 
ditions, the  modern  State  signifies  people  working  together.  The 
laissez-faire  theory  of  the  State  is  compatible  with  the  idea  of  State 
merely  as  government.  Those  under  the  influence  of  this  theory 
oppose  the  economic  activity  of  the  State  on  account  of  the  educa- 
tional value  of  private  activity,  not  stopping  to  reflect  that  in 
democracy  the  things  that  are  done  are  done  by  the  people  and 
not  by  an  external  power.  It  is  not  to  be  assumed  without  exami- 
nation that  the  management  of  a  public  waterworks  has  an  educa- 
tional value  to  the  people  at  large  inferior  to  the  educational  value 
of  the  management  of  a  private  waterworks.  Critical  examination 
and  observation  will  show  that  the  advantage  is  not  wholly  with 
either  side,  but  that  each  form  of  enterprise  has  its  own  educa- 
tional value.  Public  enterprise  educates  in  economic  affairs  more 
extensively;  private  enterprise  more  intensively. 

Purity  and  Efficiency  of  the  State  in  Relation  to  its  Economic 
Activities.  —  The  distinction  that  we  have  made  between  repres- 
sive government  and  the  cooperative  State  is  especially  important 
to  us,  as  it  is  in  the  economic  sphere  that  the  State  becomes  most 
prominent  as  a  cooperative  concern.  When  our  forefathers  in 
the  eighteenth  century  looked  upon  the  State  as  a  repressive  agency 
and  at  the  same  time  had  an  exaggerated  belief  in  human  per- 
fectibility, they  thought  of  the  State  as  gradually  dwindling  away. 
They  entertained  what  is  called  the  night-watchman  theory  of  the 
State.  It  is  now  clear,  however,  that  if  the  repressive  powers  of 
the  State  dwindle,  its  cooperative  features  must  increase  precisely 
in  the  same  proportion.  As  men  improve  in  character  their 
fitness  to  act  together,  increases.  The  French  philosopher,  Montes- 
quieu, more  than  one  hundred  and  fifty  years  ago,  laid  down  as 


460  OUTLINES   OF  ECONOMICS 

a  general  principle  that  liberty  invariably  increases  taxes.  For 
a  similar  reason  the  purity  and  efficiency  of  the  State  always 
increase  its  economic  activities. 

We  are  not  considering  here  primarily  the  political  functions 
of  the  State.  The  importance  of  preserving  law  and  order  in  the 
old  restricted  meaning  of  those  terms  is  taken  for  granted.  All 
the  activities  of  the  State  naturally  have  their  economic  side;  and, 
when  there  is  a  marked  disturbance  of  law  and  order  we  appreciate 
the  fact  that  its  maintenance  is,  after  all,  fundamental  in  economic 
life,  as  it  is  in  other  departments  of  social  life.  All  this,  however, 
is  treated  in  political  science,  and  need  not  detain  us  here. 

General  Statement  of  the  Necessity  of  State  Activity.  — The 
experience  of  the  last  century  throughout  the  entire  civilized  world 
has  convinced  men  that  oppression  and  restriction  are  found, 
not  only  within  the  framework  of  government  and  because  of 
government,  but  outside  of  government  and  in  spite  of  govern- 
ment. World-wide  experience  has  shown  that  to  secure  freedom 
it  is  necessary  to  regulate  those  economic  relations  upon  which 
our  very  life  depends.  Production  has  become  a  social  process 
and  so  has  distribution;  and  social  processes  can  be  controlled 
only  socially.  But  "  social  "  in  this  sense  does  not  necessarily 
mean  state  or  governmental  agencies.  A  great  corporation  is  a 
social  agency,  so  is  a  trade  union,  a  consumers'  league,  or  a  charity 
organization  society.  But  the  supreme  control  is  State  control, 
and  this  alone  is  all-pervasive  and  in  its  very  nature' acts  in  the 
interest  of  all.  It  is  a  perversion  of  a  private  corporation  when 
it  does  not  act  in  the  interest  of  the  few  who  form  it;  it  is  per- 
version of  the  State  when  it  acts  in  the  interest  of  the  few  and  not 
of  the  many.  Thus  we  see  in  broad,  general  outlines  the  neces- 
sity for  State  activity  in  the  economic  life. 

The  State  and  the  Fundamental  Economic  Institutions  of 
Society.  —  We  may  trace  out  the  necessity  for  State  activity  very 
briefly  along  a  few  lines.  First,  we  will  take  up  the  institutional 
field.  The  State  establishes  great  fundamental  institutions  of 
society,  such  as  property  and  contract,  already  discussed  in  Chapter 
II.  Without  the  State  we  may  have  possession;  it  is  only  through 
the  State  that  possession  becomes  property.  Without  the  State 


NECESSITY  OF  STATE  ACTIVITY  461 

we  may  have  agreement  enforceable  by  the  strong  right  arm  of  an 
interested  party.  The  State  steps  in  and  makes  agreements 
enforceable  by  its  authority  and  they  become  contracts.  The 
fundamental  institutions  of  society  are  a  matter  of  growth  and  are 
in  a  state  of  flux.  They  change  more  or  less  from  time  to  time  and 
from  place  to  place.  The  inheritance  of  property  has  as  many 
different  regulations  as  there  are  States  in  the  world.  Every 
modification  of  any  one  of  the  fundamental  institutions  modifies 
economic  life  in  general  and  the  distribution  of  wealth  in  particular. 
As  society  becomes  closely  knitted  and  compact,  the  necessity 
of  understanding  the  significance  of  the  regulation  of  the  funda- 
mental institutions  becomes  increasingly  apparent.  If  society 
is  to  be  prosperous  in  all  its  members,  we  must  have  before  us 
clearly  a  goal  which  we  wish  to  reach  and  so  shape  our  institu- 
tions as  to  enable  us  to  reach  the  desired  end.  This  does  not  mean 
any  acceptance  or  arbitrary  construction  of  Utopias,  inasmuch 
as  human  nature  has  to  be  taken  account  of  and  the  fact  that  it 
has  been  molded  by  past  institutions  and  the  past  modes  of  pro- 
duction and  exchange.  It  does  mean,  however,  that  we  must  use 
the  same  intelligence  in  constructing  our  economic  policies  that 
we  do  in  constructing  our  private  business  policies. 

Property,  Private  and  Public.  — The  right  of  private  property 
is  one  so  fundamental  in  our  modern  life  that  we  scarcely  think 
of  it  as  a  creation  of  man  maintained  by  constant  vigilance 
on  the  part  of  the  State  and  subject  to  human  modification.  Still 
less,  perhaps,  does  it  seem  to  us  a  right  open  to  question.  It 
seems  like  bed  rock,  an  ultimate  right,  needing  no  other  justifi- 
cation than  its  own  obviousness.  It  we  feel  thus,  however,  about 
the  right  of  private  property  or  ownership  it  is  only  because  we  are 
dominated  by  present  and  local  customs  rather  than  by  the  facts 
of  history  or  reason.  We  do  not  intend  to  impeach  the  right  of 
private  ownership,  but  it  is  a  right  which  may  as  fairly  be  called 
in  question  as  any  other  and  must  justify  itself  in  the  same  manner. 
When  a  custom  has  obtained  very  widely  and  is  deeply  rooted  in 
human  life  there  is  often  a  tendency  to  claim  it  as  a  "  natural 
right."  By  a  natural  right  men  usually  mean  a  right  which  is 
arbitrary,  which  is  a  right  because  it  is  a  right,  and  "  That's  all 


462  OUTLINES   OF  ECONOMICS 

there  is  about  it."  There  are  no  such  rights.  All  true  rights  are 
rational  rights,  rights  which  can  show  good  reason  for  their  claims 
and  can  justify  their  existence  on  the  ground  that  they  promote 
human  welfare. 

There  is  no  possible  basis  of  human  right  except  human 
welfare.  To  claim  that  certain  rights  are  ultimate  without  refer- 
ence to  their  effect  on  society  is  to  beg  the  question,  and  has  been 
well  characterized  as  "  dogmatism  in  disguise."  It  is  characteristic 
of  unscientific  and  superficial  thought  to  talk  much  of  natural 
rights,  and  it  is  an  encouraging  sign  that  in  our  day  such  rights  are 
subjected  more  and  more  to  searching  scrutiny.  It  is,  therefore, 
as  scientists  rather  than  as  iconoclasts  that  we  should  inquire  into 
this  time-honored  right  of  private  property. 

1.  Beginning  of  the  Right. — Looking  back  into  history  we 
discover  first  that  private  property  did  not  always  exist.    The 
savage  at  first  owned  nothing.     Doubtless  when  he  had  caught 
or  killed  an  animal  he  considered  it  more  or  less  his,  though  even 
here  it  was  the  common  property  of  the  family  or  tribe  rather  than 
his  own.     Beyond  this  there  were  no  property  rights  as  we  now 
understand  them.     Doubtless  there  were  struggles  for  the  pos- 
session of  hunting  grounds,  but  the  victor's  sense  of  ownership  or 
right  was  little  better  developed  than  that  of  a  victorious  lion  or 
buffalo.     From  these  insignificant  beginnings  the  right  or  sense 
of  ownership  has  grown,  including  more  and  more  articles  and 
dividing  up  the  ownership  more  and  more,  until  at  last  nearly 
everything  is  owned  and  nearly  everybody  owns  something.    Not 
until  the  agricultural  stage  did  land  become  property,  and  the  last 
forms  of  tribal  ownership  have  not  yet  everywhere  disappeared 
before  individual  ownership. 

2.  Strengthening  of  the  Right.  — The  next  thing  that  impresses 
us  is  that  private  ownership  has  not  always  been  so  extensive  or 
so  exclusive  as  at  present.     We  have  seen  already  that  the  insti- 
tution of  private  property  has  been  extended  to  many  things  which 
were  at  first  free  goods.     It  is  equally  noticeable  that  the  right  of 
ownership   has  grown  in  intensity  and   exclusiveness.    This  is 
especially  marked  in  the  case  of  individuals  whose  claims  as  op- 
posed to  those  of  the  tribe  were  at  first  slight  and  vague;  but  they 


NECESSITY   OF  STATE  ACTIVITY  463 

gradually  grew,  especially  in  the  case  of  the  chieftain,  until  tribal 
or  communal  rights  broke  down  before  them.  The  time  was 
when  a  Scottish  clan  had  absolute  right  to  the  territory  they 
occupied,  and  no  chieftain,  however  powerful,  could  have  abridged 
that  right.  Now  there  are  beautiful  tracts  of  country  in  Scotland 
which  are  almost  denuded  of  their  agricultural  population  because 
the  owners,  the  descendants  of  these  same  chieftains,  have  pre- 
ferred to  raise  game  rather  than  men  on  their  estates.  All  are 
familiar  with  the  general  liberty  allowed  in  this  country  of  hunting 
and  fishing  on  private  estates,  which  in  Europe  is  unheard  of. 
Slowly,  however,  we  are  beginning  to  extend  our  claim  to  game 
and  fish  also,  and  this  leniency  of  ownership  is  disappearing. 

The  nature  and  extent  of  these  changes  in  private  property  must 
be  controlled  by  the  State  in  the  public  interest.  How  far  inter- 
ference with  the  right  is  justified  cannot  be  discussed  in  general 
terms:  such  a  discussion  must  deal  with  the  specific  problems  of 
municipal  ownership,  railway  regulation,  and  innumerable  others. 
The  point  to  be  emphasized  here  is  that  in  solving  such  problems 
the  mere  fact  that  a  proposed  solution  restricts  or  enlarges  the 
right  of  private  property  cannot  itself  be  given  much  weight. 

Trade-Marks,  Copyrights,  and  Patents. — Closely  connected 
with  the  general  subject  of  property  is  a  legal  arrangement 
whereby  exclusive  privileges  are  awarded  in  return  for  ser- 
vices to  society.  These  privileges  become  a  special  form  of  pri- 
vate property,  and  have  particular  significance  in  the  distribution 
of  wealth,  although  they  are  not  without  importance  in  the  pro- 
duction of  wealth  on  account  of  the  stimulus  which  they  give  to 
improvement. 

Trade-marks  come  under  this  head.  They  give  property  in  a 
design  which  characterizes  the  product  of  a  single  undertaking, 
as  an  individual  manufacturer,  a  firm,  or  a  company.  It  is  alto- 
gether desirable  that  those  who,  by  the  superiority  of  their  wares, 
establish  a  reputation  should  be  protected  from  that  contemptible 
class  who,  without  energy  or  initiative  of  their  own,  attempt  to 
steal  the  fruits  of  the  exertions  of  others.  It  encourages  a  pro- 
ducer to  establish  a  reputation  to  know  that  he  can  distinguish  his 
goods  by  a  design  which  others  may  not  imitate. 


464  OUTLINES   OF   ECONOMICS 

Copyrights  and  Patents.  —  Government  creates  exclusive  privi- 
leges by  copyright  and  patent  laws;  but  this  is  done  professedly 
in  the  interest  of  the  general  public,  and  not  of  any  favored  class. 
Authors  and  inventors  are  granted  exclusive  rights  in  their  pro- 
ductions for  a  limited  period.  This  monopoly  is  considered  a  fit 
reward  for  valuable  public  services.  Copyrights  and  patents  have 
been  objected  to  as  interferences  with  natural  liberty,  but  they 
appear  to  have  justified  themselves  in  the  stimulus  which  they  have 
given  to  authorship  and  invention.  It  must,  however,  be  remem- 
bered that  all  intellectual  effort  is  an  historical  product.  The 
telephone,  for  example,  did  not  spring  from  the  mind  of  one  man, 
as  Minerva  from  the  head  of  Jupiter.  The  telephone  was  preceded 
by  a  century  of  scientific  invention  and  discovery,  most  of  it  poorly 
enough  remunerated.  The  telegraph  was,  similarly,  the  result 
of  generations  of  careful,  plodding  industry  of  scores  of  men. 
Professor  Henry,  of  Princeton  College,  whose  services  in  connection 
with  the  completion  of  the  telegraph  were  most  distinguished,  con- 
scientiously refused  to  take  out  any  patent.  It  also  happens  that 
several  persons  almost  simultaneously  and  independently  made 
the  same  discoveries  and  inventions.  Now,  if  the  man  who  makes 
the  finishing  touches  which  lead  to  utilization  of  a  long  line  of 
work  alone  is  rewarded,  it  is  like  paying  only  the  workman  who 
put  the  roof  on  the  house.  It  is  not  generally  understood  how 
serious  an  interference  with  liberty  patents  are.  A  man  who  has 
a  patent  is  allowed  to  say  to  all  the  rest  of  the  world,  "  Because  I 
have  first  done  such  and  such  things  you  must  not  do  them." 
Yet  there  may  be  those  who,  about  the  same  time,  without  any 
knowledge  of  him,  had  found  out  how  to  do  them.  When  a  prin- 
ciple existing  in  nature  is  allowed  to  be  patented,  and  not  merely 
the  application  of  the  principle,  the  interference  with  liberty  be- 
comes still  stronger.  The  practical  conclusion  is  somewhat  like 
this:  Patents,  like  copyrights,  are  beneficial.  Experience  seems 
to  warrant  this  assertion.  Patents  do  not,  however,  rest  on  so 
strong  a  basis  as  copyrights,  because  no  two  persons  could  ever 
write  precisely  the  same  book,  and  the  fact  that  I  have  written 
a  book  in  no  wise  keeps  you  from  writing  any  book  you  please. 
Yet  even  intellectual  effort  is  largely  a  social  product.  No  great 


NECESSITY   OF  STATE  ACTIVITY  465 

author  gives  the  world  what  was  merely  evolved  out  of  himself. 
On  the  contrary,  such  a  one  lets  an  age  speak  through  him.  The 
principle  which  should  govern  copyrights  is  a  clear  one.  It  is  to 
give  an  author  reward  for  his  services,  not  to  give  persons  a  reward 
for  services  which  others  have  performed.  As  has  been  well  said, 
were  not  copyrights  limited  we  might  now  have  a  "  Duke  of  Shake- 
speare," deriving  a  large  income  from  the  services  of  a  man  who 
lived  three  hundred  years  ago. 

Patents  should  not  be  granted  on  light  and  trivial  grounds,  and 
the  period  for  which  they  are  granted  ought  to  be  strictly  limited, 
and  subterfuges  for  the  evasion  of  this  limitation  ought  not  to  be 
suffered  to  succeed  as  at  present.  Moreover,  owners  of  patents 
ought  .to  receive  their  patents  on  conditions  which  will  compel 
them  to  use  them  or  allow  them  to  lapse;  also,  to  grant  to  others 
the  right  to  use  the  patent  on  payment  of  a  reasonable  royalty. 
It  has  also  been  found  beneficial  in  some  countries  to  lay  an  annual 
and  perhaps  slightly  progressive  tax  on  patents,  so  that  those 
which  are  not  important  or  not  used  may  not  interfere  with  indus- 
trial progress,  for  it  is  a  condition  that  non-payment  of  the  tax 
works  forfeiture  of  the  patent.  Laws  ought  also  to  be  changed  so 
as  to  prevent  such  an  abuse  of  patents  as  we  have  frequently  wit- 
nessed in  our  rural  districts,  where  farmers  have  been  induced  to 
infringe  patents  unwittingly  in  order  that  damages  might  be 
collected  from  them.  The  suggestion  of  a  former  commissioner 
of  patents,  that  the  right  of  purchase  of  a  patent  be  reserved  by 
the  United  States,  is  to  be  commended.  Our  patents  at  the 
present  time  promote  monopoly,  and  in  some  cases  interfere 
seriously,  it  is  to  be  feared,  with  manufactures.  The  patent 
laws  require  to  be  simplified  and  amended  and  their  abuses  re- 
moved. At  the  same  time  reward  should  in  some  way  always  be 
provided  for  those  who  make  valuable  inventions. 

Public  Property.  —  Public  property  operates  to  diffuse  wealth; 
this  is  in  its  very  nature.  We  may  contrast,  for  example,  the  post 
office  in  the  United  States,  which  has  given  rise  to  no  large  fortunes, 
with  the  railways  in  the  United  States,  which  have  been  the  source 
of  many  mammoth  fortunes.  On  the  other  hand,  when  the  post 
office  has  been  a  private  institution,  as  it  was  for  centuries  on  the 

2  H 


466  OUTLINES   OF  ECONOMICS 

Continent  of  Europe,  it  was  a  source  of  enormous  fortunes.  There 
are  very  many  aspects  of  public  and  private  ownership,  but  their 
respective  influence  upon  the  distribution  of  wealth  is  of  growing 
importance  and  is  destined  to  occupy  the  increasing  attention  of 
economists  and  publicists.  The  relations  of  public  to  private 
property  will  be  shaped  with  reference  to  the  prevailing  ideas  of 
wealth  distribution. 

Inheritance  of  Property.  —  As  Blackstone  stated  so  clearly 
in  his  Commentaries  on  the  Laws  of  England,  and  as  we  have 
already  seen  in  Chapter  II,  the  inheritance  of  property  is  a  different 
fundamental  institution  from  the  right  of  property.  The  laws 
governing  the  inheritance  of  property  determine  to  whom  the  right 
of  property  shall  pass.1  These  laws  of  inheritance,  as  already 
stated,  are  constantly  undergoing  change,  and  have  as  many  dif- 
ferent forms  as  there  are  authorities  regulating  inheritance  of 
property.  That  which  seems  a  mere  natural  right  at  one  time 
seems  a  natural  wrong  at  another,  as  illustrated  in  the  changing 
ideas  and  practice  concerning  the  share  of  a  father's  estate  to  be 
inherited  by  the  oldest  son.  The  laws  of  inheritance  are  of  prime 
force  in  the  distribution  of  wealth,  and  every  change  in  them  modi- 
fies the  distribution  of  wealth.  In  a  society  becoming  increasingly 
self-conscious,  it  is  necessary  to  regulate  inheritance  in  accordance 
with  those  ideas  concerning  the  diffusion  of  property  which  are 
accepted  as  the  best. 

Contract.  —  Unregulated  contract  cannot  be  free  in  any  real 
sense  of  the  term  because  back  of  contract  lie  all  the  inequalities 
and  injustices  found  in  human  society.  Contract  can  be  free  and 
equal  only  when  the  men  making  it  are  free  and  equal.  We  have 
in  consequence  the  necessity  of  regulating  contract  in  the  general 
interest;  and  this  is  recognized  in  every  country  in  the  civilized 
world.  It  is  especially  marked  in  labor  legislation,  where  the  lais- 
sez-faire theory  has  utterly  broken  down.  Where  the  processes 
of  production  are  social,  an  individual  cannot  regulate  individually 
those  relations  which  are  determined  by  contract.  The  hours  of 

1  We  use  the  term  "inheritance"  in  its  broadest  sense,  not  distinguishing  it  from 
"bequest."  It  includes  all  those  arrangements  which  determine  how  property 
shall  pass  from  one  generation  to  another. 


NECESSITY   OF   STATE   ACTIVITY  467 

labor,  for  example,  are  socially  determined.  An  employee  in  a 
great  manufacturing  establishment  has  his  hours  determined  first 
of  all  by  his  immediate  employer.  If  he  does  not  accept  these 
hours,  he  must  quit  work.  The  employer  may  be  a  great  corpora- 
don,  but  even  in  that  case  the  employer  himself  has  only  a  limited 
power  in  determining  the  length  of  the  working  day,  inasmuch  as 
he  has  to  produce  goods  and  services  in  competition  with  others, 
and  he  likewise  must  have  regard  for  general  conditions.  These 
general  conditions  must  be  determined  legislatively  and  admin- 
istratively. Even  a  modern  nation  like  France  does  not  find  itself 
wholly  free,  and  has  thought  it  necessary  to  make  an  international 
treaty  with  Italy  to  determine  conditions  of  toil  both  in  Italy  and 
in  France.  This  treaty,  dated  April  15,  1905,  marks  a  great  epoch 
in  the  history  of  labor  legislation.  It  was  the  first  of  its  kind  in 
the  world's  history,  but  has  been  followed  by  others.  It  shows 
the  anachronism  of  those  who  say  that  men,  women,  and  children 
must  be  allowed  to  work  as  many  hours  as  they  please.  They  can 
do  what  they  please  only  as  they  work  socially  and  bring  their 
social  will  to  bear  upon  individual  conditions.  This  was  conceded 
first  of  all  with  respect  to  children.  Later,  after  much  resistance, 
it  found  recognition  in  the  case  of  women.  Men,  on  account  of 
their  greater  physical  strength  and  their  superior  economic  effi- 
ciency, especially  in  organization,  are  better  able  to  regulate  their 
conditions  of  toil  individually  and  through  organizations,  but  all 
the  best  authorities  now  recognize  that  there  are  many  cases  in 
which  it  is  necessary  to  regulate  the  labor  contract  of  adult  men. 

Ethical  Level  of  Competition.  —  One  of  the  main  lines  of  activ- 
ity of  the  State  in  economic  life  consists  in  regulating  the  ethical 
level  of  competition.  One  of  the  great  morements  of  our  times 
consists  in  the  effort  to  remove  the  evils  of  competition,  not  by  its 
abolition,  but  by  its  ethical  regulation.  When  it  is  forbidden 
manufacturers  to  employ  children,  competition  exists,  but  the  ethi- 
cal level  is  raised.  An  almost  endless  number  of  illustrations  is 
afforded  by  the  legislation  in  our  own  and  other  countries  during 
the  past  generation.  Pure  food  laws  afford  the  most  marked  recent 
illustration. 

The  Consumer.  —  John  Stuart  Mill  recognized  that  there  were 


468  OUTLINES   OF  ECONOMICS 

many  cases  in  which  the  consumer  could  not  determine  the  qual- 
ity of  the  commodities  offered  him  by  the  producer,  and  this 
was  treated  by  him  as  one  of  the  exceptions  to  the  general  rule 
of  governmental  non-interference.  He  instanced  education  as  a 
case  in  which  the  greater  the  need  of  the  consumer  the  less  his 
capacity  to  pass  judgment  upon  the  kind  of  education  offered. 
We  have  seen  during  the  past  fifty  years  a  continually  widening 
field  of  State  activity  to  protect  the  consumer  in  these  cases  in 
which  he  cannot  protect  himself.  This  growing  activity  of  the 
State  is  recognized  by  modern  civilization  as  a  necessity.  It  now 
embraces  the  inspection  of  food  products,  and  it  has  been  demon- 
strated conclusively  that  very  generally  the  consumer  is  unable 
to  pass  judgment  upon  the  quality  of  the  food  which  he  purchases. 
He  is  unable  to  detect  the  presence  of  even  most  injurious  poisons. 
It  is  seen  that  the  public  health  is  involved  in  this  sort  of  economic 
activity.  After  long  resistance  to  food  inspection  and  certification 
in  the  United  States,  the  first  concession  was  made  on  account  of 
foreign  pressure.  Germany,  in  particular,  was  unwilling  to  receive 
our  meats  until  they  had  been  inspected.  A  growing  movement 
in  favor  of  protecting  the  consumer  has  found  its  culmination  in 
the  Pure  Food  Act  passed  by  Congress  in  1906. 

As  John  Stuart  Mill  so  well  said  long  ago,  we  can  draw  no  arbi- 
trary line  or  ring  fence  around  the  activity  of  government.  In 
every  case  it  has  to  be  determined  by  considerations  of  public 
utility. 

Monopolies,  Government  Ownership,  etc.  —  Wherever  competi- 
tion is  absent,  there  is  necessity  for  State  activity  which  must  take 
the  form  of  public  ownership  and  operation  or  of  control  of  cor- 
porations. This  subject,  however,  has  been  discussed  in  another 
chapter. 

The  State  the  Guardian  of  the  Permanent  Economic  In- 
terests of  Society.  —  The  State  is  conceived  of  as  having  im- 
mortality. No  definite  limit  can  be  placed  to  its  life,  and  all  its 
plans  must  be  made  with  reference  to  perpetuity  of  existence. 
Were  any  public  policies  to  be  framed  on  the  hypothesis  of  the 
decay  and  death  of  the  State,  it  would  indicate  in  itself  an  almost 
inconceivably  deplorable  condition  of  society.  It  is  therefore 


NECESSITY  OF  STATE  ACTIVITY  469 

necessary  that  the  State,  as  the  representative  of  all  the  members 
of  the  body  politic  and  of  all  generations,  should  particularly  care 
for  permanent  interests.  It  alone  has  the  nature  and  the  power 
equal  to  this  task. 

This  proposition  finds  most  clear  illustration  in  forestry.  With- 
out going  into  other  technical  details,  the  mere  fact  that  rational 
forestry  requires  plans  to  be  made  for  perhaps  one  hundred  years 
in  advance  makes  it  difficult  for  private  persons  to  safeguard  our 
interests  in  this  particular.  The  experience  of  the  civilized  world, 
that  of  the  United  States  included,  shows  conclusively  that  only 
large  State  activity,  including  a  great  deal  of  public  ownership 
and  management,  can  provide  adequately  for  our  varied  forestry 
needs.  Federal  government  as  well  as  our  separate  common- 
wealths have  made  a  good  beginning,  but  it  is  only  a  beginning; 
and  in  floods  and  drought  we  suffer  average  annual  losses  of 
many  millions  which  would  have  been  obviated  had  we  begun 
our  activity  earlier  and  carried  it  on  more  extensively. 

The  same  principles  apply  in  large  measure  to  our  great  natural 
resources,  such  as  coal  and  iron,  and  our  vast  water  power.  The 
conservation  of  our  natural  resources  for  the  general  good  —  "  for 
and  by  the  people  "  —  is  one  of  the  greatest  economic  problems 
of  the  day. 

QUESTIONS  AND  EXERCISES 

1.  Why  do  we  speak  of  the  economic  functions  of  the  State  rather  than  of 
government  ?     Is  this  distinction  merely  convenient,  or  is  it  absolute  ?     Do 
you  feel  that  you  are  governed  by  the  post  office  ?     How  do  you  help  make  it 
a  cooperative  institution? 

2.  Mention  any  illustrations  of  the  propositions  that  purity  and  efficiency 
of  the  State  increase  its  functions. 

3.  Would  your  personal  freedom  be  increased  if  the  economic  activities 
of  the  state,  city,  or  town  in  which  you  live  were  decreased  ? 

4.  Why  is  it  necessary  that  the  State  should  be  active  with  respect  to  prop- 
erty and  contract?     Does  unregulated   labor  contract  mean  servitude  and 
oppression  ?    If  so,  why  ?    If  not,  why  not  ?    What  is  the  significance  of  the 
fact  that  modern  approximations  to  slavery  rest  upon  contract   nominally 
free?     Discuss  this  proposition:    "There  is  no  greater  inequality  than  the 
equal  treatment  of  unequals."     If  a  woman  works  fourteen  hours  a  day  in 
a  sweat  shop,  is  her  contract  to  do  so  an  expression  of  her  freedom  ? 


470  OUTLINES   OF   ECONOMICS 

5.  Do  copyrights  interfere  less  with  industrial  liberty  than  patents?     If 
so,  why  ?     Would  it  be  unjust  to  refuse  to  grant  patents  hereafter  ?     Would 
it  be  inexpedient  ?     Why  ? 

6.  Contrast  public  property  with  private  property  in  its  effects  (a)  on  the 
production,  (b)  on  the  diffusion,  of  wealth. 

7.  Explain  the  reasons  for  the  increase  in  public  activity  in  the  inspection 
of  food  products.     What  evils  and  what  benefits  of  this  public  activity  have 
fallen  under  your  observation? 

8.  What  other  kinds  of  State  activity  are  discussed  in  this  chapter  ?    Give 
the  reasons  for  each. 

REFERENCES 

ADAMS,  H.  C.     "  Relation  of  the  State  to  Industrial  Action."     American 

Economic  Association  Publication,  1887. 
Agricultural  Department.     Year  Book. 
Annual  Reports  of  the  United  States  Commissioner  of  Patents,  especially  the 

Report  for  1888. 
Reports  of  the  Wisconsin  Dairy  and  Food  Commission. 


CHAPTER    XXVII 
TRANSPORTATION 

Scope  and  Significance.  —  A  complete  study  of  transportation 
would  include  a  variety  of  subjects,  as  is  seen  from  the  following 
outline:  — 

I.   Transmission  of  Ideas. 

(1)  The  Post  Office. 

(2)  The  Telegraph. 

(3)  The  Telephone. 
II.    Land  Transportation. 

(1)  Steam  Railways. 

(2)  Interurban  and  City  Railways. 

(3)  Vehicles  on  the  Common  Roads. 
III.    Water  Transportation. 

(1)  Ocean. 

(2)  Inland. 

a.  Canals. 

b.  Rivers. 

c.  Lakes. 

Transportation  may  be  studied  from  a  number  of  points  of  view, 
all  of  them  closely  related.  It  presents  its  peculiar  problems  to 
the  engineer,  to  the  lawyer,  to  the  accountant,  to  the  business 
manager,  to  the  historian,  and  finally  to  the  economist.  The 
economist  studies  the  relations  of  transportation  to  other  indus- 
tries and  to  the  public  welfare.  The  heart  of  the  subject  from 
this  point  of  view  is  the  question  of  rates  and  fares. 

Transportation  is  most  intimately  related  to  the  other  branches 
of  industry.  Hardly  anything  can  be  produced  without  the 


472  OUTLINES   OF  ECONOMICS 

participation  of  some  transportation  agent.  Modern  industrial 
civilization  would  be  impossible  without  an  efficient  system  of  com- 
mercial intercourse,  although  to  be  sure  the  dependence  is  not  one- 
sided, but  is  mutual,  for  present  methods  of  transportation  clearly 
would  be  impossible  without  our  industrial  progress.  The  in- 
fluence of  cheap  carriage  is  especially  important  in  the  fact  that 
it  promotes  an  extensive  division  of  labor  by  widening  the  market. 
It  permits  each  region  to  devote  itself  to  that  line  of  production 
for  which  it  is  best  adapted. 

In  the  present  chapter,  railway  transportation  alone  will  be 
considered,  although  the  subject  of  water  transportation  is  as- 
suming increasing  importance  in  the  United  States.  We  are 
beginning  to  realize  that  the  reaction  against  the  early  canal 
mania  has  been  too  great.  Canal  and  river  improvement,  how- 
ever, should  be  urged,  not  on  the  general  ground  that  water 
transportation  is  cheap,  but  only  where  in  specific  instances  it 
can  be  proved  to  be  as  advantageous  as  rail  transportation  when 
all  of  the  elements  of  expense  are  taken  into  consideration. 
Nor  should  canal  building  be  advocated  as  a  means  of  controlling 
railway  rates.  If  we  wish  to  regulate  the  charges  of  private 
carriers,  a  commission  of  trained  men  is  the  best  device  we  have 
yet  discovered. 

The  Railway  System  of  the  United  States.  — The  aggregate 
length  of  railway  mileage  on  June  30,  1906,  was  224,363  miles. 
The  most  important  states  with  respect  to  length  of  line  were 
Texas,  Illinois,  Pennsylvania,  Iowa,  and  Ohio.  In  number  of 
miles  of  line  per  10,000  inhabitants,  the  leading  states  or  territories 
were:  Nevada,  Arizona,  Wyoming,  New  Mexico,  and  Montana, 
but  in  number  of  miles  of  line  per  100  square  miles  of  territory, 
the  lead  was  taken  by  the  District  of  Columbia,  New  Jersey, 
Massachusetts,  Pennsylvania,  and  Ohio.  The  foregoing  refers  to 
the  length  of  road  without  regard  to  the  second,  third,  or  fourth 
tracks.  To  operate  this  mileage  the  railway  companies  employ 
about  3^  per  cent  of  the  persons  engaged  in  gainful  occupations 
in  the  United  States.  The  numerical  strength  and  average 
daily  wages  of  each  class  of  employees  is  given  in  the  following 
table :  — 


TRANSPORTATION 


473 


TABLE  I 
CLASSIFICATION  or  EMPLOYEES  — 1906 


CLASS 


NUMBER 


AVERAGE  DAILY 
COMPENSATION 


General  officers 6,090 

Other  officers 6,705 

General  office  clerks 57i2io 

Station  agents 34,940 

Other  station  men 138,778 

Enginemen 59,855 

Firemen 62,678 

Conductors 43,93^ 

Other  trainmen 119,087 

Machinists 5X»253 

Carpenters 63,830 

Other  shopmen 199,940 

Section  foremen 40,463 

Other  trackmen 343,791 

Switch  tenders,  crossing  tenders,  and  watch- 
men    49,659 

Telegraph  operators  and  dispatchers 36,090 

Employees  —  account  floating  equipment.  ..  .  8,314 

All  other  employees  and  laborers 198,736 

Total 1,521,355 


Sn.8i 
5-82 
2.24 
1.94 
1.69 
4.12 
2.42 
3-5i 
2-35 
2.69 
2.28 
1.92 
i.  80 
1.36 

1.80 

2-!3 
2.IO 

1.83 


The  amount  of  passenger  service  in  a  year  is  sufficient  to  give 
every  man,  woman,  and  child  in  the  United  States  a  journey  of 
over  two  hundred  miles,  and  the  amount  of  freight  reported  as 
carried  (originating  on  line)  is  more  than  ten  tons  for  each  inhab- 
itant (1900).  The  mileage  of  empty  freight  cars  is  nearly  half 
as  large  as  the  mileage  of  loaded  freight  cars. 

In  1906  there  were  1287  operating  roads  in  the  United  States, 
of  which  1007  were  nominally  independent.  Nine  tenths  of  these 
lines  are  less  than  250  miles  in  length,  and  represent  less  than  a 
fifth  of  the  total  mileage.  On  the  other  hand,  the  fifty  largest 
roads  control  about  two  thirds  of  the  total  mileage. 

Railway  Competition.  — The  early  roads  were  short,  independ- 


474  OUTLINES   OF   ECONOMICS 

ent  lines  largely  for  local  traffic  or  to  serve  as  feeders  to  canals. 
The  first  movement  toward  the  efficiency  of  the  present  system 
was  the  welding  together  of  separate  links  into  through  lines. 
The  New  York  Central,  for  example,  was  formed  in  1853  out  of 
ten  previously  independent  lines  between  Albany  and  Buffalo. 
The  development  of  parallel  through  lines  introduced  an  era  of 
sharp  competition.  In  the  seventies  the  lines  connecting  Chicago 
and  the  Atlantic  seaboard  engaged  in  a  series  of  rate  wars.  The 
experience  of  this  decade  showed  clearly  the  tempo rary  and  un- 
stable character  of  competition  among  parallel  lines.  The  rule 
seemed  to  be  that  a  railway  war  must  be  followed  by  a  rate  agree- 
ment of  some  sort,  so  that,  instead  of  the  maintenance  of  a  suppos- 
edly fair  level  of  rates  by  the  steady  pressure  of  competition,  we 
find  there  was  an  alternation  of  high  and  low  rates.  The  inevi- 
table annihilation  of  direct  competition  in  rates  between  railways 
is  clearly  portrayed  in  a  congressional  report  in  1874,  where  the 
following  prediction  was  made:  "  But  when  the  natural  tendencies 
of  corporate  power  have  wrought  out  their  inevitable  conclusions, 
the  magnitude  of  our  combinations  will  probably  be  in  proportion 
to  the  extent  of  the  field  in  which  they  operate."  But  so  strong 
was  the  feeling  at  that  time  that  competition  is  the  life  of  trade, 
that  it  was  recommended  by  the  committee  who  made  this  report 
that  the  government  build  a  line  of  its  own  simply  to  maintain 
competition  with  the  private  roads,  for  it  was  thought  that  the 
government  could  resist  the  great  temptation  to  combine  with  the 
other  roads. 

The  history  of  Belgium  affords  an  instructive  illustration  of  the  effect  of 
a  mixed  system  of  public  and  private  ownership.  Belgium  began  in  1837 
with  a  carefully  worked-out  system  of  public  railways.  Ten  years  later  it 
was  decided  to  grant  charters  to  private  companies.  A  large  number  of 
private  roads  were  organized,  some  with  the  purpose  of  competing  with  the 
state  system.  It  was  thought  that  competition  between  the  state  and  private 
roads  would  be  beneficial.  The  Massachusetts  Railroad  Commission,  in  its 
report  of  1871,  recommended  a  trial  of  this  plan  in  Massachusetts  But  in 
Belgium  the  private  lines  were  soon  merged  into  four  systems,  which  com- 
peted so  vigorously  with  the  state  roads  that  the  government  adopted  the 
policy  of  purchasing  them.  The  mixed  system  was  also  tried  in  Prussia  with 
unfavorable  results.  The  advantages  of  government  management  cannot 
show  themselves  fully  under  such  conditions. 


TRANSPORTATION  475 

Pooling  and  Consolidation.  —  As  a  result  of  the  intense  struggle 
for  business  among  the  roads,  there  was  a  widespread  resort  to 
the  practice  of  pooling,  that  is,  a  division  of  the  earnings  or  tonnage 
of  the  competitive  business.  This  form  of  combination,  however, 
was  at  least  nominally  abandoned  after  it  was  declared  illegal 
by  the  Interstate  Commerce  Act  of  1887,  but  organizations  for  the 
purpose  of  making  rates  continued  to  exist.  In  1894  these  were 
also  declared  illegal  by  the  Supreme  Court  of  the  United  States 
on  the  ground  that  they  were  in  violation  of  the  Anti-Trust  Act  of 
1890.  The  court,  however,  did  not  seem  to  prohibit  the  enlarge- 
ment of  the  various  systems  by  the  purchase  and  lease  of  other 
lines,  or  controlling  them  indirectly  by  the  purchase  of  the  ma- 
jority of  their  stock.  But  in  1903  the  Supreme  Court  again 
applied  the  Anti-Trust  Act  of  1890  in  a  case  against  the  Northern 
Securities  Company,  a  corporation  formed,  not  for  the  purpose  of 
engaging  in  the  railway  business  directly,  but  for  the  purpose  of 
holding  the  capital  stock  of  the  Great  Northern,  Northern  Pacific, 
and  Burlington  systems.  But  the  legal  prohibitions  have  had 
little  effect  upon  the  tendency  to  eliminate  competition  from  the 
railway  business. 

The  present  organization  of  any  one  of  our  large  systems,  like 
a  geological  record,  reveals  the  nature  of  the  changes  that  have 
been  going  on.  The  consolidated  company  controls  a  number  of 
large  lines,  perhaps  by  stock  ownership,  and  each  one  of  these  is 
made  up  of  a  number  of  subsidiary  roads  united  as  a  result  of 
purchase,  partial-stock  ownership,  or  lease. 

But  the  extent  of  consolidation  is  not  shown  by  the  growth  of 
the  large  systems,  for  these  are  not  wholly  independent.  A 
number  of  the  large  systems  may  be  under  the  control  of  the  same 
group  of  financiers.  While  the  actual  extent  of  this  centralization 
in  ownership  is  difficult  to  state,  the  well-known  illustrations  are 
striking:  the  Harriman  group  includes  the  Union  Pacific,  the 
Southern  Pacific,  the  Illinois  Central,  and  the  Chicago  and  Alton 
systems,  with  partial  control  of  the  Baltimore  and  Ohio.  In 
the  Gould  group  are:  the  Missouri  Pacific,  Wabash,  Denver  and 
Rio  Grande,  Western  Pacific,  Texas  and  Pacific,  and  the  St.  Louis 
and  Southwestern  systems.  The  Great  Northern,  Northern  Pa- 


476  OUTLINES   OF  ECONOMICS 

cific,  and  Burlington  systems  are  under  one  control.  The  Penn- 
sylvania until  recently  controlled  the  Baltimore  and  Ohio  and 
Norfolk  and  Western  systems.  The  Vanderbilt  interests  domi- 
nate the  New  York  Central,  the  Chicago  and  Northwestern,  and 
the  Cleveland,  Cincinnati,  Chicago,  and  St.  Louis  systems. 

In  spite  of  the  progress  of  consolidation,  competition  has  not 
entirely  disappeared.  Even  where  there  is  no  active  cutting  of 
rates  by  parallel  lines,  there  may  be  rivalry  in  service,  but  this 
also  has  its  limitations,  as  is  seen  in  the  agreements  that  the  shorter 
lines  between  New  York  and  Chicago  and  between  Chicago  and 
Minneapolis  shall  not  utilize  their  natural  advantage  in  speed. 
Again,  alternative  routes  may  lead  to  competition  among  railways 
that  are  not  parallel.  Thus  the  roads  serving  the  North  Atlantic 
ports  compete  in  the  carriage  of  grain  with  those  extending  to 
Galveston  and  New  Orleans. 

Much  has  recently  been  said  about  the  influence  of  market 
competition  as  a  force  affecting  rates,  even  when  the  roads  have 
been  consolidated.  To  illustrate,  the  farmers  and  railways  of 
North  Dakota  are  joint  producers  of  wheat,  and  they  are  both 
desirous  that  it  shall  be  sold  in  competition  with  other  wheat  in 
the  London  market.  It  would  be  ruinous  to  the  roads  to  make 
such  high  rates  that  the  farmers  could  not  afford  to  sell  their  grain. 
The  railways  cannot  be  prosperous  if  the  farmers,  merchants, 
and  manufacturers  along  their  lines  are  not  prosperous.  This 
partnership,  however,  has  its  limits,  for  a  rate  which  would  enable 
the  producer  to  continue  in  business  may  yield  the  railway  a  sur- 
plus which  could  be  shared  with  the  producer. 

The  MoTement  of  Rates.  — The  average  revenue  per  ton-mile 
of  railways  in  the  United  States  fell  from  i.ooi  cents  in  1888  to 
.729  cents  in  1900,  rising  again  to  .780  in  1904,  .766  in  1905,  and 
.748  in  1906.  Average  ton-mile  receipts,  however,  are  not  an 
accurate  index  of  changes  in  rates,  for  such  an  index  is  affected 
by  the  changes  in  the  nature  of  the  traffic  as  well  as  by  changes 
in  rates  charged.  If  the  proportion  of  low-grade  freight  increases, 
there  will  be  a  fall  in  ton-mile  receipts  without  any  change  in  rates. 
But  if  we  also  take  into  consideration  rates  on  specific  commodities, 
such  as  wheat,  stoves,  etc.,  no  doubt  remains  but  that  a  large 


TRANSPORTATION  477 

decrease  has  taken  place.  In  the  last  forty  years  there  has  prob- 
ably been  a  fall  of  one  half  in  rates  on  through  traffic,  but  the  fall 
was  mostly  in  the  first  half  of  that  period;  in  the  second  half  there 
has  been  only  a  slight  fall,  with  possibly  some  increase  since  1900. 
In  local  rates  the  decline  has  been  less  marked.  The  decline  in 
passenger  rates  before  the  recent  reductions  by  government  au- 
thority was  less  than  in  freight  rates.  Improvement  in  service 
should,  however,  be  considered  in  this  connection.  But  what- 
ever the  actual  movement  of  rates,  the  question  will  inevitably  be 
asked  whether  they  have  declined  as  much  as  they  should  have 
done,  and  whether  the  growth  in  consolidation  which  we  have 
noted  will  not  prevent  such  a  decline  in  the  future  as  may  be 
warranted  by  the  growth  in  traffic  and  attendant  economies  in 
operation.  The  question  is,  how  shall  a  "reasonable"  freight 
rate  be  determined? 

The  Level  of  Rates.  —  If,  owing  to  the  monopolistic  nature  of 
the  railway  business,  the  determination  of  rates  can  no  longer  be 
left  to  the  automatic  working  of  competitive  forces,  they  must 
be  consciously  determined  according  to  fundamental  principles. 
Competition  was  supposed  to  do  justice  by  limiting  the  aggregate 
earnings  of  an  establishment  approximately  to  the  expenses  of 
doing  the  business,  and  it  seems  most  natural  that  we  should  apply 
the  same  guide  in  our  conscious  rate  making.  There  can  be  no 
doubt  but  that  expense  is  a  safe  guide  so  far  as  it  can  be  accurately 
determined.  It  needs  but  a  slight  analysis  of  railway  expenditure, 
however,  to  reveal  the  difficulty  of  using  expense  as  a  criterion  of  a 
fair  rate.  In  1906  the  railways  reported  to  the  Interstate  Com- 
merce Commission  gross  income  amounting  to  $2,386,285,473 
(from  operation  and  investments),  and  in  this  same  year  the  interest 
and  dividends  amounted  to  $530,545,911,  or  22.2  per  cent  of  the 
gross  income.  This  represents  the  amount  accruing  to  the  stock 
and  bondholders  as  joint  owners  of  the  business,  if  we  ignore  the 
increase  in  the  value  of  the  plant  that  results  from  charging  im- 
provements to  operating  expenses.  Is  this  a  proper  payment  to 
such  owners?  That  some  compensation  of  this  sort  is  necessary 
under  the  regime  of  private  capitalism  is  clear,  for  if  none  were 
made,  new  roads  would  not  be  built  nor  would  old  ones  be  main' 


478  OUTLINES   OF  ECONOMICS 

tained.  A  common  answer  is  that  the  owners  should  be  allowed 
a  fair  return  upon  their  investment,  but  it  is  difficult  to  say  what  is 
a  fair  return  and  what  is  the  actual  investment.  Inasmuch  as 
the  institution  of  private  capitalism  is  maintained  for  the  benefit 
of  the  community  and  not  the  community  for  the  benefit  of  private 
capitalism,  that  payment  to  owners  of  the  railways  is  proper  which 
is  necessary  to  evoke  their  services,  that  is,  the  service  of  main 
taining  and  extending  the  railway  system  in  accordance  with  the 
public  needs.  This  basis  suggests  the  application  of  the  current 
rate  of  interest  to  the  cost  of  reproducing  the  physical  property 
in  its  present  condition  as  a  general  guide,  although  doubtless 
our  regard  for  vested  interests  would  compel  us  to  take  account 
of  the  fact  that  present  holders  of  stocks  and  bonds  have  in  many 
cases  paid  high  prices  for  them  in  anticipation  of  the  continuance 
of  the  present  monopoly  earnings  of  the  railways.  It  should 
also  be  remembered  that  to  guarantee  to  every  dollar  invested  in 
railways  the  current  rate  of  interest  would  be  to  create  a  privi- 
leged class  of  investors.1  The  attempt  to  find  a  valuation  upon 
which  to  reckon  earnings  has  been  sharply  criticised,  but  no  other 
solution  for  the  problem  of  finding  a  reasonable  level  of  rates  has 
been  offered.  Reject  this,  and  we  have  the  alternative  of  letting 
the  railways  charge  what  they  please,  or  of  adopting  government 
ownership. 

Relative  Rates.  —  When  the  level  of  rates  has  been  determined 
we  are  confronted  by  the  further  question  of  what  should  be 
charged  for  each  particular  shipment,  and  here  we  find  the  applica- 
tion of  the  principle  of  expense  of  still  greater  difficulty  and  un- 
certainty. In  attempting  to  say  what  it  costs  to  carry  a  ton  of 
coal  a  mile,  we  find  that  a  large  part  of  the  expenditure  is  incurred, 
not  for  one  specific  kind  of  commodity,  but  jointly  for  many  kinds. 
The  roadbed,  ties,  and  rails  are  maintained,  not  for  coal  cars 
alone,  but  for  passenger  trains  as  well.  Even  with  the  most  care- 
ful bookkeeping  it  is  possible  to  trace  a  causal  connection  between 
only  a  part  of  the  expenses  and  specific  portions  of  the  traffic. 

1  This  principle  has  been  recognized  by  the  Supreme  Court  of  the  United  States 
in  County  of  Stanislaus  (California)  vs.  San  Joaquin  and  King's  River  C.  &  I. 
Co.,  1903,  193  U.S.  201.  Compare  also  page  an,  above. 


TRANSPORTATION  479 

It  is  possible  to  say  that  a  certain  traffic  requires  a  certain  amount 
of  extra  labor  and  fuel,  and  causes  a  certain  amount  of  wear  and 
tear,  and  clearly  such  traffic  should  normally  pay  enough  to  meet 
these  expenses,  at  least,  if  we  wish  to  prevent  waste.  But  what 
shall  be  done  with  such  joint  expenditures  as  fall  under  the  head  of 
maintenance  of  way?  Shall  they  be  charged  to  the  freight  or  to 
the  passenger  departments?  If  partly  to  both,  on  what  basis 
shall  they  be  divided  ?  A  full  discussion  of  the  matter  cannot  be 
given  here.  Some  writers  think  that  the  attempt  to  discover  the 
exact  cost  of  carrying  a  commodity  cannot  be  determined.  They 
would  charge  these  common  expenses  to  those  shipments  which 
can  most  easily  bear  them.  This  principle  is  followed  in  part  in 
all  freight  classifications.  But  recently  the  view  that  the  cost  of 
transporting  a  commodity  can  be  determined  has  received  support 
in  a  decision  of  the  Railroad  Commission  of  Wisconsin.  Follow- 
ing the  practice  of  manufacturing  corporations,  the  commission 
made  a  complete  apportionment  to  the  freight  and  passenger  de- 
partments of  the  expenditures  of  one  railway  system,  using  an  arbi- 
trary basis  that  seemed  fair  where  no  direct  connection  could  be 
found  between  the  expense  and  each  branch  of  the  traffic. 

To  illustrate  the  nature  of  the  problem,  we  may  note  the  Commission's 
method  of  dealing  with  one  class  of  expenditure  —  maintenance  of  way. 
It  was  necessary  first  to  apportion  expenditures  between  that  part  of  the  road 
lying  in  Wisconsin  and  that  part  lying  in  other  states.  For  this  purpose 
the  cost  of  maintaining  the  way  was  first  divided  into  two  parts:  (a)  that 
depending  on  natural  depreciation,  and  (b)  that  due  to  the  movement  of 
trains.  The  first  was  apportioned  to  Wisconsin  on  the  basis  of  the  road 
mileage,  and  the  second  according  to  the  revenue  train  mileage  in  Wisconsin. 
The  Commission  then  proceeded  to  separate  the  Wisconsin  expenditure 
between  the  passenger  and  freight  departments.  That  part  of  the  expense 
due  to  the  movement  of  trains  was  divided  between  passenger  and  freight 
traffic  according  to  the  amount  of  passenger  train  mileage  and  freight  train 
mileage  respectively,  switching  mileage  being  taken  as  freight  train  mileage. 
That  part  due  to  natural  depreciation  was  apportioned  according  to  the  gross 
earnings  of  the  two  departments.  This  last  procedure  is  perhaps  open  to 
criticism  because  gross  earnings  depend  in  part  on  prices  charged,  and  it  was 
the  reasonableness  of  existing  prices  that  it  was  sought  to  determine.  In  the 
long  run  the  natural  depreciation  depends  on  how  costly  a  plant  is  exposed 
to  wind  and  weather;  in  the  long  run  the  size  of  the  plant  grows  with  the 
traffic;  and  as  traffic  is  roughly  measured  by  train  mileage,  we  may  say 


480  OUTLINES   OF  ECONOMICS 

that  train   mileage  would  be  a  more  reasonable  basis  for  the  division  of 
expenses  due  to  natural  depreciation.1 

Distance.  —  The  most  perplexing  factor  in  rate  making  is  that 
of  distance.  In  actual  practice,  distance  has  been  ignored  to  a 
very  large  degree.  For  example,  in  group  rates,  the  same  charge 
is  made  to  a  common  market  from  any  point  within  a  certain  area, 
irrespective  of  the  length  of  the  haul.  In  the  basing-point  system, 
the  rates  to  small  towns  in  a  certain  region  will  not  vary  according 
to  the  distance  from  the  point  of  shipment,  but  are  found  by  adding 
together  the  rate  to  a  railway  center,  called  a  basing  point,  and  the 
local  rate  from  this  basing  point  to  the  small  town,  even  though 
the  town  be  nearer  than  the  basing  point  to  the  original  point  of 
shipment.  Again,  goods  brought  from  a  foreign  country  to  a 
point  in  the  interior  may  be  charged  a  less  rate  than  the  domestic 
rate  from  the  point  of  entry  to  the  same  point  in  the  interior. 
Again,  goods  intended  for  export  sent  from  Chicago  to  New  York 
may  pay  less  than  those  intended  for  use  in  New  York.  Goods 
are  sent  to  San  Francisco  from  New  York  for  less  than  the  rate 
from  many  points  west  of  the  Mississippi  River  to  San  Francisco. 
These  conditions  have  arisen  largely  from  competition  of  rail- 
ways among  themselves  and  with  waterways,  and  do  not  seem 
to  be  necessary  from  the  standpoint  of  the  welfare  of  the  country 
as  a  whole.  The  fact  that  distance  is  one  element  in  the  expense 
of  carriage  suggests  that  it  should  be  taken  account  of  in  making 
rates,  although  there  are  many  circumstances  which  necessitate 
a  departure  from  the  rule  of  a  strict  mileage  rate.  The  fact  that 
terminal  charges,  for  example,  are  the  same  for  a  long  as  for  a 
short  haul  justifies  a  decline  in  the  total  charge  per  ton-mile  as 
distance  grows.  The  great  advantage  of  following  a  schedule  of 
rates  based  on  distance  is  that  it  affords  some  basis,  although  not 
an  absolute  guide,  for  settling  sectional  disputes  concerning  rail- 
way charges. 

Government  Ownership  or  Government  Regulation?  —  With 
the  decline  of  competition  in  the  railway  business,  the  alternative 
lies  between  private  operation  with  government  supervision  on 

1  In  Buel  vs.  C.  M.  and  St.  P.  Ry.  Co.,  Wisconsin  Railroad  Commission 
Reports,  Vol.  I,  pp.  334  and  508. 


TRANSPORTATION  481 

the  one  hand,  and  government  ownership  and  operation  on  the 
other.  The  important  arguments  in  favor  of  private  operation 
are:  (i)  efficiency  in  management;  (2)  greater  elasticity  in  meeting 
the  varying  demands  of  business;  (3)  the  danger  in  government 
operation  of  throwing  sectional  disputes  as  to  rates  into  politics. 
The  important  arguments  in  favor  of  government  operation  are: 
(i)  the  essential  conflict  between  private  and  public  interests 
in  the  conduct  of  the  business,  the  aim  of  the  one  being  profit,  the 
aim  of  the  other  being  service;  (2)  the  elimination  of  the  rail- 
way interests  from  politics;  (3)  the  unearned  increment  would 
accrue  to  society;  (4)  the  elimination  of  personal  discrimination. 

On  whichever  side  the  weight  of  the  argument  may  lie,  we  in 
the  United  States  are  likely  to  make  a  more  thorough  experi- 
ment with  private  operation  under  government  regulation. 

Government  Regulation  of  Railways  in  the  United  States.  — 
Railway  corporations  in  the  United  States  are  almost  all  organized 
under  the  laws  of  the  separate  states.  Formerly  special  laws  were 
passed  when  a  railway  company  was  to  be  formed,  but  at  the  pres- 
ent time  there  are  general  laws  specifying  what  conditions  must 
be  complied  with  in  order  that  a  number  of  persons  may  organize 
a  railway  corporation.  The  separate  states  have  imposed  a  number 
of  regulations  and  restrictions  not  only  on  the  companies  which 
they  have  chartered  but  also  on  others  doing  business  within  their 
borders.  These  relate  to  the  safety  and  comfort  of  passengers, 
the  train  service,  consolidations,  pooling,  ticket-scalping,  discrimi- 
nations between  shippers  and  places,  and  finally  the  reasonable- 
ness of  charges.  Railway  commissions  are  found  in  a  majority 
of  the  states.  One  type,  exemplified  by  the  Massachusetts  com- 
mission, has  simply  advisory  and  investigative  powers  with  respect 
to  rates,  but  it  cannot  name  reasonable  rates  and  enforce  them, 
although  it  can  recommend  such  action  to  the  legislature.  An- 
other type  has  power  to  name  a  reasonable  rate  in  place  of  one  that 
has  been  found  unreasonable.  Such  is  the  Wisconsin  commission, 
and  the  tendency  is  for  the  latter  type  to  prevail. 

That  a  railway  corporation  is  subject  to  government  regulation 
in  the  interest  of  the  public  welfare  has  been  clearly  established 
by  a  long  line  of  judicial  decisions  beginning  with  the  leading 


482  OUTLINES    OF   ECONOMICS 

"  Granger  "  case  of  Munn  vs.  Illinois.1  But  the  authority  of 
the  state  governments  has  been  greatly  limited  by  two  provisions 
in  the  federal  Constitution.  Congress  having  been  given  control 
over  interstate  commerce,  the  states  must  confine  themselves  in 
their  regulations  to  commerce  wholly  within  the  state.  Again, 
the  Fourteenth  Amendment  declares  that  no  state  shall  deprive 
any  person  of  life,  liberty,  or  property  without  due  process  of  law 
nor  deny  to  any  person  within  its  jurisdiction  the  equal  protection 
of  the  law.  The  courts  have  interpreted  this  provision  to  mean 
that  neither  a  state  legislature  nor  a  commission  created  by  it  can 
fix  rates  even  on  iw/ra-state  traffic  without  a  review  by  the  courts. 
The  courts  have  in  some  cases  declared  rate  legislation  void  on 
the  ground  that  it  confiscated  the  property  of  the  stockholders. 
The  activity  of  the  federal  government  may  be  summarized  as 
follows :  — 

(i)  As  to  rates:  All  charges  made  for  the  transportation  of 
passengers  or  property  must  be  "  just  and  reasonable,"  but  no 
standard  of  reasonableness  or  justice  has  been  given  by  Congress. 
This  question  is  left  largely  to  the  judgment  of  the  Interstate 
Commerce  Commission,  a  body  of  seven  men  appointed  by  the 
President  with  the  "  advice  and  consent  "  of  the  Senate.  When 
a  complaint  has  been  made,  the  commission,  if  it  finds  upon 
investigation  that  the  rate  complained  of  is  unreasonable,  may 
prescribe  what  shall  be  the  maximum  charge  in  that  case  in  the 
future.  Its  order  may  be  set  aside  by  the  courts,  for  the  Fifth 
Amendment  restrains  the  federal  government  as  the  Fourteenth 
does  the  state  governments.  Rates  must  be  published  and  filed 
with  the  Commission,  and  the  railway  must  not  under  penalty 
depart  from  the  published  rate,  nor  make  any  change  without  thirty 
days'  notice.  There  shall  be  no  "unjust  discrimination"  or 
"  unreasonable  preference  "  in  the  making  of  rates.  In  particular, 
the  giving  or  accepting  of  rebates  is  punishable.  Also,  no  greater 
charge  shall  be  made  for  a  short  than  for  a  long  haul  on  goods 
going  in  the  same  direction  on  the  same  line  under  "  substantially 
similar  circumstances  and  conditions."  This  last  provision  has 
been  much  weakened  by  the  interpretation  placed  upon  it  by  the 

1  1876,  94  U.S.  113. 


TRANSPORTATION  483 

United  States  Supreme  Court,  which  has  held  that  competition 
of  railways  at  one  point  might  constitute  a  dissimilar  circumstance 
justifying  a  lower  charge  for  the  longer  haul. 

(2)  As  to  publicity  of  accounts:  The  carriers  are  required  to 
report  to  the  Interstate  Commerce  Commission  regarding  their 
finances  and  traffic.    The  Commission  has  access  to  the  records 
and  may  prescribe  the  form  in  which  they  shall  be  kept. 

(3)  As  to  combinations:   It  is  unlawful  for  railways  to  enter 
into  an  agreement  for  the  pooling  of  freights  or  earnings.     Agree- 
ments to  maintain  freight  rates  are  also  unlawful  as  coming  under 
the  Anti-Trust  Act  of  1890  which  prohibits  "  every  contract,  com- 
bination in  the  form  of  trust  or  otherwise,  or  conspiracy,  in  restraint 
of  trade  or  commerce  among  the  several  states,  or  with  foreign 
nations." 

(4)  As  to  safety  appliances:   Carriers  must  equip  their   cars 
with  automatic  couplers,  train  brakes,  grab  irons  and  hand  holds. 
The  law  does  not  require  the  introduction  of  block  signal  systems. 

The  Work  of  the  Interstate  Commerce  Commission.  —  Since  its 
creation  in  1887  the  Interstate  Commerce  Commission  has  done 
much  good  work  in  promoting  an  understanding  of  the  relations 
between  the  public  and  the  railways,  but  in  the  actual  removal 
of  abuses  its  powers  proved  utterly  inadequate.  As  a  result  of  a 
wave  of  popular  indignation,  Congress  in  1906  extended  the  Com- 
mission's power  of  investigation  and  increased  somewhat  its  power 
over  rates.  Nothing,  however,  was  done  to  give  definiteness  to 
the  long  and  short  haul  provision,  nor  were  steps  taken  to  settle 
the  fundamental  question  of  the  level  of  rates. 

QUESTIONS  AND   EXERCISES 

i.  Write  a  description  of  some  railway  system,  giving  its  organization, 
capitalization,  earnings,  dividends,  nature  of  traffic  and  territory  covered,  etc. 

2.  Make  a  digest  of  the  opinions  in  the   Northern   Securities   case,    193 
U.S.  197. 

3.  If  you  have  paid  $200  for  a  share  of  stock  in  a  monopolistic  enterprise, 
have  you  a  right  to  complain  if  government  regulation  so  affects  its  earnings, 
that  the  price  of  the  share  falls  to  $100? 

4.  Should  the  large  shipper  get  lower  rates  than  the  small  shipper? 

5.  Compare  the  powers  of  the  Interstate   Commerce  Commission  with 
those  of  the  Canadian  Commission. 


484  OUTLINES   OF  ECONOMICS 

REFERENCES 

ACWORTH,  W.  M.  Elements  of  Railway  Economics,  Chaps.  I  and  II.  (Not 
favorable  to  cost  theory.) 

"  American  Waterways."  (Twenty  articles  on  various  phases  of  the  subject.) 
Annals  of  the  American  Academy  of  Political  and  Social  Science,  Jan- 
uary, 1908,  Vol.  XXXI. 

DEWSNUP,  E.  R.  (Editor).  Railway  Organization  and  Working.  (De- 
scriptive.) 

Hearings  before  the  Committee  on  Interstate  Commerce,  United  States 
Senate,  1905-6  (including  Digest).  Digest,  pp.  57-75;  and  Vol.  Ill, 
pp.  2310  to  2360. 

Interstate  Commerce  Commission,  Annual  Reports,  Decisions,  and  Statistics 
of  Railways  in  the  United  States. 

JOHNSON,  E.  R.  American  Railway  Transportation,  and  Ocean  and  Inland 
Water  Transportation.  (Elementary  Text-books.) 

McPnERSON,  L.  G.     The  Working  of  the  Railroads,  Chap.  III. 

MERRITT,  A.  N.     Federal  Regulation  of  Railway  Rates. 

MEYER,  B.  H.  Railway  Legislation  in  the  United  States,  Part  II ;  also 
"History  of  the  Northern  Securities  Case,"  Bulletins  of  the  University 
of  Wisconsin,  No.  142. 

MEYER,  H.  R.  Government  Regulation  of  Railway  Rates.  (Severely  critical 
of  the  work  of  government  officials.) 

Munn  vs.  Illinois,  94  U.S.  113. 

NOYES,  W.  C.     American  Railroad  Rates,  Chap.  IV. 

RIPLEY,  W.  Z.  Railway  Problems.  (A  collection  of  supplementary  reading.) 
"  Railroad  Valuation,"  Political  Science  Quarterly,  December,  1907, 
Vol.  XXII. 

United  States  vs.  Trans-Missouri  Freight  Association,  166  U.S.  290. 

WEBB.     Economics  of  Railroad  Construction,  Part  I. 


CHAPTER    XXVIII 
INSURANCE 

Nature  of  Insurance.  —  The  essential  idea  of  the  modern  in- 
stitution of  insurance  is  cooperation  in  the  bearing  of  losses  which 
are  likely  to  happen  to  any  one  of  a  large  group  of  persons  but 
which  will  actually  fall  upon  but  few  members  of  the  group.  It 
is  thus  directly  opposed  to  gambling,  although  wagers  have  fre- 
quently been  made  in  the  form  of  the  insurance  contract.  It 
may  appear  at  first  that  the  man  who  insures  his  house  is  making 
a  wager  with  the  insurance  company  that  his  house  will  burn, 
but  this  is  in  fact  like  betting  on  both  sides  of  an  event.  If  the 
man  does  not  insure,  he  may  be  regarded  as  betting  that  his  house 
will  not  burn,  and  by  wagering  with  the  insurance  company  that 
it  will  burn,  he  relieves  himself  of  risk.  For  this  relief  he  is  willing 
to  incur  the  certain  loss  of  his  premium.  Insurance  means  cer- 
tain loss  for  the  policy  holders,  but  it  implies  many  small  losses 
in  place  of  a  few  unbearable  ones.  In  well-developed  forms  of 
insurance  there  is  also  no  risk  for  the  insurance  company  because 
the  amount  of  loss  is  approximately  known  in  advance,  as  will  be 
explained  presently. 

The  question  is  sometimes  asked  whether  insurance  is  pro- 
ductive in  the  sense  that  other  economic  activities  are  productive. 
The  answer  is  decidedly  in  the  affirmative,  for  the  feeling  of  security 
that  it  makes  possible  is  a  real  satisfaction  which  we  are  willing 
to  purchase.  Furthermore,  the  relief  of  distress  among  the  un- 
fortunate without  compelling  them  to  accept  charity  is  a  distinct 
social  gain,  and  finally,  many  of  our  business  operations  are 
facilitated  by  the  existence  of  a  system  of  insurance.  Prevention 
of  loss  is  not  properly  a  part  of  the  idea  of  insurance,  but  never- 
theless, insurance  as  it  exists  to-day  does  have  many  tendencies 
in  that  direction,  especially  in  such  forms  as  fire  and  steam-boiler 

485 


486  OUTLINES   OF  ECONOMICS 

insurance.  On  the  other  hand,  insurance  causes  a  certain  amount 
of  loss  by  provoking  to  some  extent  incendiarism,  self-mutilation, 
or  suicide,  and  even  normal  persons  are  likely  to  be  less  careful 
when  they  know  they  are  insured.  On  the  whole,  however,  we 
can  scarcely  overestimate  the  importance  to  society  of  an  in- 
stitution which  equalizes  the  shocks  and  multiplies  the  incentives 
to  thrift  and  wholesome  economic  activity. 

The  Law  of  Probabilities.  —  A  special  profession  (that  of  the 
actuary)  and  a  special  branch  of  mathematics  have  grown  up  as 
a  basis  of  the  institution  of  insurance.  It  is  a  knowledge  of  the 
law  of  large  numbers  that  changes  the  insurance  business  from  a 
wager  to  a  legitimate  business.  If  a  coin  is  tossed  a  large  number 
of  times,  heads  will  appear  about  as  often  as  tails.  This  may  be 
counted  upon  as  practically  certain,  but  with  respect  to  any 
particular  throw  taken  by  itself,  there  is  no  way  of  telling  in  ad- 
vance whether  heads  or  tails  will  appear.  This  truth  has  been 
worked  out  and  applied  most  definitely  to  life  insurance,  but  in 
other  branches  also  an  effort  is  made  to  gather  sufficient  data  that 
will  make  possible  the  formulation  of  statistical  laws  as  a  guide 
for  future  business. 

Origin  and  Development.  —  Arrangements  embodying  the  idea 
of  insurance  are  found  among  the  ancients,  but  the  modern  in- 
stitution of  insurance,  although  its  origin  is  obscure,  first  becomes 
prominent  in  the  loans  on  bottomry  which  became  common  during 
the  thirteenth  and  fourteenth  centuries.  A  loan  on  bottomry 
meant  that  money  was  borrowed  by  the  owner  of  a  ship  and  was 
to  be  repaid  with  interest  at  the  termination  of  the  voyage,  but 
the  principal  and  interest  were  not  to  be  repaid  if  the  ship 
was  lost.  Sometimes  this  took  the  form  of  insuring  the  captain's 
life,  but  no  scientific  system  of  life  insurance  appeared  until  the 
compilation  of  life  tables. 

Fire  insurance  received  an  impetus  from  the  Great  Fire  of 
London  in  1666,  the  first  company  organized  upon  strict  mer- 
cantile principles  being  the  Fire  Office,  organized  in  1680.  It 
had  a  brigade  of  its  own  to  prevent  and  extinguish  fires.  In 
1693  Edmund  Halley  made  a  report  to  the  Royal  Society  regard- 
ing the  mortality  at  various  ages  upon  the  basis  of  tables  of  births 


INSURANCE  487 

and  funerals  at  the  city  of  Breslau,  but  practically,  life  insurance 
as  a  business  dates  from  the  organization  of  the  "  Old  Equitable" 
in  1762. 

Before  this,  however,  there  were  many  associations  for  conducting  in- 
surance upon  a  speculative  basis,  which  entered  into  wagers  of  every  con- 
ceivable description.  "Even  the  morality  of  the  newspapers  of  that  day 
was  shocked  by  such  proceedings:  we  find  the  London  Chronicle  of  1768 
thus  declaiming,  '  The  introduction  and  amazing  progress  of  illicit  gaming 
at  Lloyd's  Coffee-house  is,  among  others,  a  powerful  and  very  melancholy 
proof  of  the  degeneracy  of  the  time.  Though  gaming  in  any  degree  is  per- 
verting the  original  and  useful  design  of  that  Coffee-house,  it  may  in  some 
measure  be  excusable  to  speculate  on  the  following  subjects: — Mr.  Wilkes 
being  elected  member  for  London;  -which  was  done  from  5  to  50  guineas 
per  cent. ;  —  Mr.  Wilkes  being  elected  member  for  Middlesex,  from  20  to 
70  guineas  per  cent;  —  Alderman  Bond's  life/or  one  year,  now  doing  at  7  per 
cent;  —  On  Sir  J.  H.  [mark  the  modesty]  being  turned  out  in  one  year,  now 
doing  at  12  guineas  per  cent;  —  On  John  Wilkes'  life  for  one  year,  now 
doing  at  five  per  cent.  N.B.  —  Warranted  to  remain  in  prison  during  that 
period;  —  On  a  declaration  of  war  with  France  or  Spain  in  one  year,  8 
guineas  per  cent.  But,'  continues  the  sensitive  journalist,  'when  policies 
come  to  be  opened  on  two  of  the  first  peers  in  Britain  losing  their  heads 
at  IQS.  6d.  per  cent,  or  on  the  dissolution  of  the  present  parliament  within 
one  year  at  5  guineas  per  cent.,  which  are  now  actually  doing,  and  under- 
written chiefly  by  Scotsmen,  at  the  above  Coffee-house,  it  is  surely  high  time 
to  interfere.'  " l 

In  the  United  States,  fire  insurance  was  fairly  well  begun  even 
in  pre-revolutionary  days.  In  1830  was  organized  the  New  York 
Life  and  Trust  Company,  and  twelve  years  later  appeared  the 
Mutual  Life  Insurance  Company  of  New  York,  which  is  the  oldest 
of  the  existing  life  insurance  companies  which  insure  more  than 
a  restricted  class  of  individuals.  Tables  I  and  II  show  the  growth 
of  life,  fire,  and  marine  insurance  in  the  United  States.  A  decline 
in  the  number  and  importance  of  life  companies  appears  in  the 
seventies.  The  numerous  failures  of  this  period  brought  the 
"old  line"  life  insurance  into  discredit,  and  in  the  following 
years  this  fact,  together  with  the  desire  for  cheap  insurance,  caused 
a  marked  development  of  assessment  insurance,  against  which 
there  has  in  turn  been  a  reaction  because  of  its  unscientific  basis. 
Recently  the  "old  line"  companies  have  again  suffered  a  loss  of 
1  Walford,  The  Insurance  Guide  and  Handbook,  4th  ed.,  p.  27. 


488 


OUTLINES   OF   ECONOMICS 


TABLE   I 

NUMBER  OF  POLICIES  AND  AMOUNT  OF  INSURANCE  IN  FORCE  IN  ORDI- 
NARY AND  INDUSTRIAL  COMPANIES,  1850  TO  1905  l 


ORDINARY 

INDUSTRIAL 

Year 

Number  of 
Policies 

Amount  (Dollars) 

Number  of 
Policies 

Amount  (Dollars) 

i8<CO    . 

29,407 
60,000 
839,226 
679,690 
890,924 
1,319.561 
1,940,945 
3.176,o5i 
5.621,417 

68,614,189 
180,000,000 
2,262,847,000 
1,564,183,532 

2>I55>33°,627 
3,620,057,439 
4,917,694,131 
7,093,152,380 
11,054,255,524 

i860    

1870    . 

1880    

236,674 

I,377>15° 
3,883,529 

6,952-757 
11,219,296 
16,872,583 

20,533,469 
145,938,241 
429,521,128 
820,740,641 
1,468,986,366 
2,309,754,253 

188-;     . 

1890    

iSot;    . 

IOOC 

TABLE   II 
FIRE,  MARINE,  AND  CASUALTY  INSURANCE,  1890-1905  l 


FIRE  AND  MARINE  (STOCK  AND  MUTUAL) 


Year 

Number 
of  com- 
panies 

Total  income 

Payments  to 
policy  holders 

Number 
of  com- 
panies 

Total  income 

Payments 
to  policy 
holders 

Dollars 

Dollars 

Dollars 

Dollars 

1890  .    .    . 

580 

I57,857,983 

80,768,012 

34 

9,758,413 

2,933,306 

1892  .    .    . 

491 

179,044,675 

104,864,902 

49 

12,727,576 

4,063,374 

1893  .    .    . 

489 

178,971,022 

114,652,625 

46 

15,140,830 

4,815,298 

1894  .    .    . 

558 

176,364,638 

100,919,134 

41 

14,238,564 

4,601,207 

1895   .    .    . 

583 

176,300,042 

97,379.026 

47 

18,077,146 

5,430,607 

1896  .    .    . 

541 

172,945,625 

89,903,460 

5° 

20,154,235 

6,494,944 

1897  .    .    . 

53° 

i76,75I-I24 

87,165,252 

53 

22,859,866 

7,113,818 

1898  .    .    . 

5°4 

178,320,217 

97,974,682 

54 

23,478,642 

7,583>54i 

1899  .    .    . 

484 

184,142,217 

114,619,372 

59 

27,II7>449 

8,802,777 

1900  .    .    . 

493 

198,312,577 

116,753,281 

62 

32,309,619 

10,166,796 

1901   .    .    . 

482 

216,452,381 

121,020,924 

67 

39,844,427 

12,966,145 

1902  .    .    . 

489 

239,468,206 

123,332,012 

67 

43,980,061 

14,952,568 

1903  .    .    . 

563 

261,431,401 

125,434,065 

73 

49,716,644 

16,679,975 

1904  .    .    . 

55° 

281,228,402 

165,658,558 

82 

55,685,447 

I9.332,539 

1905   .    .    . 

612 

296,562,588 

140,825,191 

95 

63,190,680 

21,646,844 

CASUALTY  AND  MISCELLANEOUS 


1  See  Statistical  Abstract  of  the  United  States  (annual)  and  The  Insurance   Year  Books 
published  annually  by  the  Spectator  Company,  New  York,  N.Y. 


INSURANCE  489 

prestige  on  account  of  the  scandalous  extravagance  and  corrup- 
tion revealed  by  official  investigations.  The  evil  practices  had 
to  do  chiefly  with  the  management  of  the  surplus,  which  was  not 
under  legal  control  as  was  the  reserve.  These  terms  will  be  ex- 
plained presently.  It  is  probable  that  they  will  now  learn  the 
lesson  of  economy,  just  as  they  have  learned  from  their  experience 
a  generation  ago  the  supreme  need  of  being  solvent.  Insurance 
has  grown  until  the  insurance  companies  rival  the  banks  in 
financial  importance.  The  assets  of  the  leading  life  insurance 
companies  are  nearly  equal  to  the  capital  and  deposits  of  all 
national  banks. 

Forms  of  Insurance  Organization.  —  Fire  insurance  may  be 
written  by  stock  companies,  by  mutual  companies,  or  by  associa- 
tions of  individual  insurers,  known  as  underwriters  and  Lloyds. 
Mutual  companies,  again,  may  be  either  local  county  or  town* 
mutuals,  state  or  general  mutuals,  or  the  manufacturers'  mutuals. 
The  local  town  mutuals  have  the  advantage  that  they  can  be 
conducted  with  a  very  low  cost  of  administration,  but  the  business 
of  fire  insurance  seems  best  adapted  to  the  stock  companies,  since 
it  is  desirable  that  the  risk  of  a  conflagration  should  be  spread 
over  a  very  wide  territory. 

Life  companies  are  also  found  both  in  the  stock  and  mutual 
form.  Theoretically  the  management  of  the  latter  is  in  the  hands 
of  the  policy  holders  themselves,  but  in  actual  practice  they  must 
be  managed  by  a  small  group  of  financiers.  Attempts  have  been 
made  by  recent  legislation  in  some  states  to  make  the  manage- 
ment more  nearly  representative  of  the  interests  of  the  policy 
holders  by  providing  for  election  of  officers  by  mail.  Life  in- 
surance companies  are  also  classified  according  to  the  plans  of 
premium  payments:  (i)  "old  line"  level  premium,  (2)  assessment, 
(3)  stipulated  premium,  and  (4)  fraternal  orders. 

Wherever  risk  enters  in  modern  life,  companies  are  organized 
to  offer  an  escape  from  it  through  insurance  even  before 
enough  data  have  been  collected  to  make  possible  the  accurate 
prediction  of  the  amount  of  loss.  In  addition  to  life  insurance 
we  have  indemnity  in  case  of  sickness,  accident,  destruction  by 
fire,  wind,  hail,  explosions  of  boilers  or  fly  wheels,  broken  windows, 


490 


OUTLINES    OF   ECONOMICS 


and  loss  from  burglary  or  the  unfaithfulness  of  employees.  Li- 
ability insurance  in  over  a  dozen  different  forms  guards  against 
loss  from  damage  suits.  It  is  impossible  to  take  up  the  problems 
that  are  peculiar  to  each  one  of  these  branches,  but  we  note  the 
leading  features  of  the  most  important  branch  in  life  insurance. 

LIFE  INSURANCE 

Life  Tables.  —  A  life  table  or  mortality  table  shows  how  many 
of  a  large  group  of  persons  of  the  same  age  will  survive  to  each 
higher  age.  A  number  of  these  tables  have  been  calculated, 
but  the  one  generally  used  in  this  country  is  the  American  Ex- 
perience Mortality  table,  a  portion  of  which  is  here  reproduced :  — 


AGE 

LIVING  AT  BEGINNING  OF  YEAR 

DYING  DURING  THE  YEAR 

10 

IOO,OOO 

749 

it 

99.251 

746 

12 

98,505 

743 

13 

97,762 

740 

14 

97,022 

737 

15 

96,285 

735 

16 

95.55° 

732 

17 

94,818 

729 

18 

94,089 

727 

J9 

93,362 

725 

* 

* 

* 

90 

847 

385 

91 

462 

246 

92 

216 

137 

93 

79 

58 

94 

21 

18 

95 

3 

3 

With  such  data  and  with  an  assumed  rate  of  interest  and  ex- 
penses, it  is  possible  to  say  with  considerable  certainty  how  much 
money  must  be  collected  from  the  policy  holders  in  order  to  pay 
each  one  $1000  or  other  sum  at  death. 

Premium  Plans.  —  It  would  be  possible  to  collect  from  those 
surviving  at  each  age  enough  money  to  pay  for  the  deaths  that 


INSURANCE  491 

would  happen  during  the  ensuing  year.  This  step  rate  plan 
would  mean  in  the  later  years  of  the  table  a  larger  and  larger 
assessment ;  that  is,  at  the  time  when  the  earning  power  of  the 
insured  was  declining.  It  has  become  customary  to  arrange  the 
payments  on  what  is  known  as  the  level  premium  plan,  the  same 
annual  payment  being  made  throughout  the  life  of  the  policy. 
This  payment  may  be  on  the  ordinary  life  plan,  that  is,  the  pay- 
ments continue  throughout  life;  or  ten,  fifteen,  or  twenty  limited 
payments  may  be  made,  the  policy  continuing  in  force  for  life; 
or  the  insurance  may  be  for  only  a  term  of  years  during  which  the 
premiums  are  paid,  the  insurance  ceasing  entirely  at  the  end  of 
the  term.  This  is  the  cheapest  kind  of  insurance,  for  the  insurance 
company  knows  that  many  of  the  insured  will  survive  beyond  the 
term,  and  to  them  no  payment  need  be  made,  but  when  the  in- 
surance continues  for  life,  the  payment  becomes  a  certainty  in 
every  case. 

The  Reserve.  —  If  a  level  premium  is  charged,  the  income  of 
the  company  in  the  earlier  years  exceeds  its  current  mortality 
requirements.  The  portions  of  the  premium  not  currently  used 
must  be  held  for  the  credit  of  the  policy  holders  until  the  later 
years,  a  certain  rate  of  interest  being  allowed.  This  accumulating 
fund  is  known  as  the  reserve. 

Surplus.  —  If  the  insured  die  less  rapidly  than  was  assumed 
by  the  company  in  calculating  its  premiums,  more  money  will 
be  collected  than  is  necessary  to  meet  the  obligations  of  the  in- 
surance contracts.  This  is  one  source  of  surplus.  Again,  the 
funds  held  in  trust  by  the  company  may  be  invested  at  a  higher 
rate  of  interest  than  was  assumed  in  the  calculations,  and  this  is 
a  second  source  of  surplus.  A  third  source  of  surplus  is  in  keep- 
ing expenses  below  what  was  assumed  in  the  calculations.  (The 
addition  which  is  made  to  the  net  premium  to  cover  expenses  is 
called  "loading,"  and  is  commonly  not  far  from  a  third  of  the  net 
premium.)  The  amounts  paid  in  by  those  who  lapse  or  surrender 
their  policies  do  not  all  go  to  the  surplus,  for  it  is  customary  now 
to  allow  surrender  values  and  paid-up  insurance,  but  as  these 
values  are  subject  to  a  surrender  charge,  there  is  an  addition  to 
the  surplus  from  the  surrendered  or  lapsed  policies,  although  the 


492  OUTLINES   OF  ECONOMICS 

companies  try  to  discourage  lapsing.  Out  of  this  surplus  are 
paid  the  dividends  on  the  capital  stock,  if  there  be  any,  and 
the  dividends  to  each  policy  holder,  which  in  some  cases  are 
credited  or  paid  annually  to  each  policy  holder,  or  in  other  cases 
not  until  the  expiration  of  a  period  of  years. 

Endowments.  —  What  is  ordinarily  called  an  endowment 
policy  is  a  combination  of  two  distinct  forms  of  contract.  A 
simple  life  insurance  contract  promises  to  pay  the  insured  a  certain 
sum  in  the  event  of  death;  a  pure  endowment  contract  would  pay 
a  certain  sum  if  the  holder  of  the  policy  survives  after  a  period 
of  years.  A  twenty-year  so-called  "endowment"  policy  com- 
bining these  two  features  means  that  payment  would  be  made 
at  death  if  that  occurred  within  the  twenty  years,  or  at  the  expira- 
tion of  twenty  years  if  the  policy  holder  survives. 

This  form  of  policy  has  been  declining  in  popularity  because 
in  its  ordinary  form  it  is  disadvantageous  to  the  policy  holder, 
unless  he  be  so  thriftless  that  he  cannot  be  induced  to  save  in  any 
other  way;  also,  if  insurance  could  not  be  obtained  in  any  other 
way,  it  might  be  wise  to  purchase  such  a  policy,  but  the  objects 
of  saving  and  insuring  can  be  more  cheaply  accomplished  by 
separating  the  two  features.  If,  instead  of  paying  $50  for  an 
endowment  policy,  the  holder  paid  part  of  this  for  term  insurance 
and  put  the  remainder  in  a  savings  bank  at  three  or  four  per  cent 
compound  interest,  there  might  be  more  to  his  credit  whether 
he  lived  or  died.  But  when  the  loading  is  properly  arranged, 
and  with  an  annual  distribution  of  surplus,  the  endowment  policy 
performs  a  useful  function  as  an  encouragement  of  thrift.  In 
fact,  a  very  long  term  endowment  maturing  at,  say,  age  sixty-five, 
would  best  meet  the  needs  of  a  great  many  persons. 

These  points  will  be  made  clearer  by  the  following  illustration 
of  what  becomes  of  the  premium  in  the  case  of  a  ten-year  endow- 
ment policy  at  age  thirty-five  with  a  premium  of  $107.70,  when 
it  is  assumed  that  the  mortality  will  be  in  accordance  with  the 
American  Experience  Table,  that  the  company  will  earn  three 
per  cent  on  its  funds,  and  that  the  expense  charged  each  year  to 
this  policy  will  be  as  given  in  the  following  table : l  — 

1  Report  of  the  Wisconsin  Joint  Legislative  Investigating  Committee,  1906, 
P-  iS3- 


INSURANCE 


493 


POLICY  YEAR 

EXPENSE  CHARGE 

MORTALITY  CHARGE 

DEPOSIT 

I 

$18.40 

$7.96 

$81.34 

2 

18.40 

7-31 

165.77 

3 

18.40 

6.62 

253-42 

4 

18.40 

S-89 

344-43 

5 

18.40 

5.10 

438.96 

6 

18.40 

4.26 

537-17 

7 

18.40 

3-32 

639.27 

8 

18.40 

2.32 

745-43 

9 

18.40 

1.  21 

855-89 

10 

18.40 

970.87 

Totals 

184.00 

43-99 

Industrial  Insurance.  —  The  business  of  insuring  the  lives  of 
workingmen  in  this  country  is  characterized  by  the  small  amount 
of  the  average  policy,  the  large  number  of  lapses,  and  the  heavy 
expense  of  solicitation.  These  companies  say  the  workingman 
is  so  thriftless  that  it  is  necessary  to  collect  the  premiums  through 
a  house  to  house  canvass  by  agents.  The  hesitancy  shown  by 
workingmen  to  insure  in  these  companies  is  considered  by  some 
persons,  however,  as  an  evidence  of  their  thrift.  Which  is  the 
correct  view  will  be  shown  by  the  results  of  an  experiment  which 
is  now  being  tried  in  the  state  of  Massachusetts.  Savings  banks 
have  been  authorized  to  organize  insurance  departments  and  to 
sell  life  insurance,  but  without  employing  paid  agents  or  solicitors. 
The  workingman  is  expected  to  go  to  the  bank  of  his  own  accord. 
The  whole  system  is  supervised  by  a  State  Actuary  and  a  State 
Medical  Director,  and  the  safety  of  the  plan  is  assured  by  a  guaran- 
tee fund.  Three  forms  of  policies,  limited  to  $500,  are  provided 
for:  ordinary  life  insurance,  endowment,  and  a  combination  of 
life  insurance  and  old-age  annuity.  This  plan  may  prove  to  be 
a  solution  of  the  problem  of  old  age  pensions. 

State  Insurance.  —  Insurance  is  well  adapted  to  direct  manage- 
ment by  the  State  because  the  actual  conduct  of  the  business  is 
of  a  relatively  simple  and  routine  character  and  because  the  State 
can  offer  greater  security  and  can  command  greater  confidence 


494  OUTLINES   OF   ECONOMICS 

than  is  possible  in  the  case  of  a  private  corporation.  Competi- 
tion has  had  the  effect  of  causing  rival  companies  to  invent  many 
outwardly  attractive  combinations  of  policy  conditions,  but  on 
the  whole  it  has  increased  rather  than  decreased  the  expense  of 
doing  the  business.  When  the  State  enters  the  field  simply  as  an 
additional  competitor,  as  in  New  Zealand,  its  full  advantage  is 
not  apparent ;  but  if  it  has  a  monopoly  of  the  business  and  com- 
pels every  one  to  insure,  it  perhaps  can,  without  any  selection  of 
risks,  effect  the  insurance  at  a  lower  price  than  is  asked  by  any 
existing  private  company.1  These  considerations,  however,  can 
hardly  be  taken  as  sufficient  arguments  for  the  present  assump- 
tion of  insurance  functions  by  the  State. 

State  Regulation.  —  Following  the  example  of  Massachusetts 
in  1858,  other  states  have  appointed  insurance  commissioners 
for  the  supervision  of  this  business,  and  the  insurance  laws  of 
a  single  one  of  these  states  are  now  sufficient  to  make  a  good- 
sized  volume.  Insurance  companies  have  found  this  variety  of 
control  irksome  and  have  generally  advocated  federal  control  of 
insurance.  Although  something  would  be  gained,  it  cannot  be 
said  that  there  is  any  great  need  of  federal  control  of  life  insurance, 
not  to  mention  the  constitutional  difficulties,  because  it  is  not 
absolutely  necessary,  as  in  transportation  or  fire  insurance,  that 
one  life  company  do  business  in  many  states,  and  the  people  of 
each  state  should  have  the  right  to  say  what  kind  of  insurance 
institutions  they  desire  to  have. 

An  enumeration  of  the  requirements  in  the  state  of  New  York 
will  illustrate  the  nature  of  state  regulation:  A  certificate  of 
authorization  must  be  obtained  from  the  Superintendent  of 
Insurance  and  a  deposit  of  securities  must  be  made.  A  minimum 
capital  stock  is  prescribed  and  regulations  are  made  concerning 
the  investment  of  stock  and  surplus.  There  are  also  provisions 
relating  to  standard  of  solvency,  reinsurance,  limitation  of  risks, 
admission  of  foreign  companies,  examination  of  accounts,  and 
annual  reports.  The  policy  must  contain  the  entire  contract, 
and  the  statements  are  to  be  taken  as  representations  and  not 

1  Consult  the  article  by  M.  M.  Dawson  in  Bliss,  Encyclopedia  of  Social  Reform, 
new  ed. 


INSURANCE  495 

warranties.  No  misleading  estimates  and  deceptive  statements 
are  to  be  issued  for  the  purpose  of  getting  business.  Life  insur- 
ance companies  are  to  do  either  a  participating  or  non-par- 
ticipating business,  and  in  the  former  case  the  surplus  must  be 
annually  apportioned  and  paid  to  each  policy.  There  are  further 
provisions  regarding  the  valuation  of  policies,  surrender  values, 
discrimination,  election  of  directors,  limitation  of  the  amount  of 
new  business  each  year,  limitations  as  to  expenses  and  salaries  of 
officers,  and  standard  forms  of  policies  are  prescribed  for  both  life 
and  fire  insurance.1 

QUESTIONS 

1.  How  do  you  define  insurance? 

2.  What  is  a  mortality  table? 

3.  How  would  you  find  the  premium  for  insuring  a  group  of  persons  for 
one  year  for  $1000  each? 

4.  Distinguish  between  reserve  and  surplus. 

5.  What  is  a  "pure"  endowment  policy? 

6.  What  are  the  advantages  and  objections  of  assessment  insurance? 

7.  What  has  been  New  Zealand's  experience  with  State  insurance? 

8.  What  is  meant  by  the  "  moral  hazard  "  ? 

9.  What  are  tontine  policies? 

10.   Discuss  life  insurance  investments. 

REFERENCES 

ALEXANDER,  WILLIAM.     The  Life  Insurance  Company. 

Annals  of  the  American  Academy  of  Political  and    Social  Science  (a  series 

of  articles),  Vol.  XXVI. 
DAWSON,  M.  M.     The  Elements  of  Life  Insurance  and  The  Business  of 

Life  Insurance. 

FRICKE,  WILLIAM  A.  (Compiler).    Insurance  —  A  Text-book. 
Gow,  WILLIAM.     Marine  Insurance. 
Institute  of  Actuaries,  Text-book. 

KITCHIN,  F.  H.     The  Principles  and  Finance  of  Fire  Insurance. 
MOIR,  HENRY.     Life  Assurance  Primer. 

New  York  Insurance  Investigating  Committee,  Report,  1905,  6  vols. 
"  Q.  P."     How  to  buy  Life  Insurance. 
WAMBAUGH,  EUGENE.     A  Selection  of  Cases  on  Insurance. 
Yale  Insurance  Lectures,   1903-1904,  2  vols. 
WALFORD,  CORNELIUS.     The  Insurance  Guide  and  Handbook. 
Wisconsin  Insurance  Investigating  Committee,  Report,  1906. 
ZARTMAN,  L.  W.     The  Investments  of  Life  Insurance  Companies. 

1  See  Parker,  A.  J.,  Jr.,  The  Insurance  Law  of  New  York,  New  York,  1907. 


CHAPTER    XXIX 
ECONOMIC   ACTIVITIES   OF   MUNICIPALITIES 

Importance  of  Municipal  Activity.  —  Far  reaching  as  are  the 
economic  activities  of  the  state  and  federal  governments,  they  are 
surpassed  in  magnitude,  if  not  in  importance,  by  the  similar  ac- 
tivities of  the  municipal  governments.  Finance  statistics  furnish 
a  rough  measure  of  the  scope  of  such  functions.  In  1902,  for  ex- 
ample, the  public  debt  of  the  cities,  villages,  and  towns  ($1,387,- 
316,976)  was  greater  than  the  public  debt  of  the  county,  territo- 
rial, state,  and  national  governments  combined  ($1,356,485,129). 
The  local  administrative  divisions,  moreover,  including  counties, 
collect  and  spend  more  money  year  by  year  than  the  state  and  na- 
tional governments;  and  taking  into  account  the  fact  that  munici- 
pal functions  are  to  a  much  greater  degree  economic  than  the 
functions  of  the  national  government,  it  is  probable  that  the  cities 
having  more  than  8000  inhabitants  in  1902,  with  their  current 
expenditures  of  $551,234,172,  really  spent  more  for  distinctively 
economic  purposes  than  the  national  government,  with  current 
expenditures  of  $617,530,137. 

By  the  use  of  financial  statistics,  moreover,  we  may  obtain  a 
rough  idea  of  the  relative  importance  of  the  economic  as  compared 
with  the  political  or  social  activities  of  the  cities  themselves.  Re- 
cent census  bulletins  have  distinguished  the  commercial  or  quasi- 
economic  receipts  of  cities  from  the  general  revenue  receipts.  In 
1902  these  commercial  receipts  constituted  22  per  cent  of  all  the 
revenues  in  cities  containing  over  25,000  inhabitants,  and  20.7  per 
cent  of  the  total  revenues  in  cities  containing  over  8000  but  less 
than  25,000  inhabitants.  These  figures  establish  a  fair  inference 
that  as  municipalities  increase  in  size,  a  larger  and  larger  share  of 
the  public  activity  is  devoted  to  economic  services.  The  same 

496 


ECONOMIC   ACTIVITIES  OF  MUNICIPALITIES         497 

phenomenon  appears  in  the  total  state,  county,  and  municipal 
finances  of  the  different  sections  of  the  country.  Taking  the  coun- 
try as  a  whole  and  considering  all  revenues  except  those  received 
by  the  national  government,  15.6  per  cent  are  derived  from  com- 
mercial sources.  In  New  England,  with  its  high  proportion  of 
urban  residents,  20.6  per  cent  of  the  aggregate  revenues  are  com- 
mercial; in  the  South  Central  division,  with  its  low  percentage  of 
urban  population,  only  13.3  per  cent  are  commercial.  Generally 
speaking,  the  economic  activities  of  the  State  vary  directly  as  the 
density  of  the  population. 

Commonplace  as  such  a  conclusion  may  be,  it  carries  with  it, 
nevertheless,  a  profound  significance.  City  life  means  crowding, 
and  crowding  means  greater  social  friction  or  greater  social  soli- 
darity, according  as  the  State  fails  or  succeeds  in  its  task  of  devis- 
ing rules  by  which  the  swarming  city  masses  may  live  together, 
not  only  in  peace  and  concord,  but  to  better  advantage  and  with 
greater  profit.  In  the  preceding  pages  we  have  emphasized  again 
and  again  the  necessity  for  increased  regulation  on  the  part  of  the 
State.  Many  factors  cooperate  to  justify  this  thesis.  But  the 
most  powerful  factor  of  all  is  created  by  the  simple  interplay  of 
two  economic  facts,  whose  importance  can  never  be  overestimated 
—  the  growth  of  urban  or  semi-urban  populations,  and  the  com- 
parative fixity  of  the  territory  upon  which  those  populations  must 
dwell  and  work. 

If  the  position  taken  above  be  correct,  we  have  only  to  glance 
at  the  steadily  swelling  population  of  our  cities  to  understand  why 
State  control  either  through  regulation  or  ownership  must  increase. 
In  1800,  four  inhabitants  out  of  every  one  hundred  dwelt  in  a 
city  containing  8000  inhabitants  or  more.  In  1900,  thirty-three 
out  of  ever)'  one  hundred  inhabitants  dwelt  in  cities  of  this  descrip- 
tion. And  the  movement  to  the  cities  still  continues.  In  the 
states  taking  an  interdecennial  census,  in  1905,  48.5  per  cent  of 
the  total  population  dwelt  in  the  incorporated  places  having  8000 
inhabitants  or  more  (in  1900),  while  only  45.8  percent  of  the  popu- 
lation dwelt  in  the  same  places  in  1900.  The  increase  of  the  gen- 
eral population  of  these  states  between  1900  and  1905  was  9.2 
per  cent;  the  increase  of  their  urban  population  as  above  defined 


498  OUTLINES   OF  ECONOMICS 

was  15.2  per  cent.  In  some  states,  and  these  perhaps  most  typical 
of  present  tendencies,  a  large  majority  of  the  entire  population 
dwelt  in  cities  of  8000  inhabitants  or  more,  the  proportion  in  1905 
reaching  71.7  per  cent  in  New  York,  67.4  per  cent  in  Massachusetts, 
and  66.4  per  cent  in  Rhode  Island.  Even  in  Illinois,  a  typical 
state  of  our  greatest  agricultural  region,  more  than  half  the  popu- 
lation dwelt  in  such  cities,  according  to  census  estimates,  in  1906. 
To-day  the  city  of  New  York  contains  a  larger  population  than  did 
the  whole  United  States  at  the  beginning  of  Washington's  first 
administration;  it  spends  more  money  than  the  national  govern- 
ment did  at  any  time  previous  to  the  Civil  War;  and  its  annual 
budget  largely  surpasses  in  amount  that  of  Turkey,  Portugal,  Aus- 
tria-Hungary, China,  Holland,  Norway,  or  Sweden. 

Character  of  Municipal  Activities.  —  But  there  is  another  and  a 
more  important  reason  why  the  activities  of  the  State  must  multi- 
ply and  become  increasingly  economic  as  a  larger  and  larger  pro- 
portion of  the  population  make  their  homes  in  the  cities.  The 
mere  agglomeration  of  people  in  a  restricted  locality  creates  a  vast 
fund  of  wealth,  which  occupies,  as  it  increases,  a  larger  and  larger 
share  of  the  public  attention.  Land  values  go  up,  the  streets  of  the 
city  acquire  enormous  value,  the  opportunities  of  serving  the  dense 
city  population  in  a  variety  of  ways  multiply;  in  short,  the  public 
domain  of  the  city  is  enormously  enhanced  in  value,  and  the  city 
government  is  forced  to  give  more  and  more  thought  to  its  proper 
exploitation  and  development.  The  typical  economic  problem  of 
the  modern  city  is  summed  up  in  the  one  word  "  franchise  ";  and 
the  municipal  franchise  is  largely  a  product  of  mere  agglomera- 
tion. 

This  fund  of  franchise  values  has  perhaps  done  more  than  any- 
thing else  to  transform  the  character  of  city  government.  Where 
the  people  in  their  collective  capacity  have  little  or  no  property 
and  are  forced  to  raise  all  public  revenue  by  taxation,  there  is 
likely  to  be  not  only  a  passive  and  fitful  interest  in  public  affairs, 
but  the  activity  of  the  government  is  equally  apt  to  be  comprised 
within  very  narrow  limits.  Give  the  people,  however,  a  public 
treasure  to  preserve,  a  patrimony  to  protect,  valuable  franchises 
to  guard  from  pillage,  and  exploit  for  the  public  profit,  and  their 


ECONOMIC  ACTIVITIES   OF  MUNICIPALITIES        499 

interest  is  aroused.  The  public  by  very  necessity  is  forced  to 
abandon  its  old  attitude  of  laissez-faire,  and  do  something  more 
than  maintain  a  balance  between  private  interests  through  its 
police  and  courts.  It  becomes  a  proprietor;  its  household,  its 
property,  its  bank  account  grow;  its  interests  become  more  and 
more  economic. 

"  In  earlier  days,  even  the  most  elementary  public  functions  were  performed 
by  the  individual.  He  paved,  cleaned,  and  lighted  the  street  before  his  door. 
He  was  his  own  constable.  Such  health  protection  as  he  enjoyed  was  the 
result  of  his  own  vigilance.  Education  was  conducted  at  home  or  by  the 
church.  The  library  was  a  priestly  possession,  as  was  all  learning.  His 
house  was  his  castle,  even  in  the  midst  of  the  city,  and  society  offered  him 
little  save  the  administration  of  justice  and  protection  from  foreign  foes. 

"To-day  the  city  protects  his  life  and  his  property  from  injury.  It  safe- 
guards his  health  in  countless  ways.  It  cleans  and  lights  his  streets,  collects 
his  garbage,  supplies  him  with  employees  through  free  employment  bureaus. 
It  educates  his  children,  supplies  them  with  books,  and  in  many  instances 
with  food.  It  offers  him  a  library,  and  through  the  opening  of  branches 
almost  brings  it  to  his  door.  It  offers  nature  in  the  parks ;  supplies  him  with 
opportunities  for  recreation  and  pleasure  through  concerts,  lectures,  and  the 
like.  It  maintains  a  public  market;  administers  justice;  supplies  nurses, 
physicians,  and  hospital  service,  as  well  as  a  cemetery  for  burial.  It  takes 
the  refuse  from  his  door  and  brings  back  water,  gas,  and  frequently  heat  and 
power  at  the  same  time.  It  inspects  his  food,  protects  his  life  and  that  of  his 
children  through  public  oversight  of  the  conditions  of  factory  labor.  It 
safeguards  him  from  contagious  disease,  facilitates  communication  upon  the 
streets,  and  in  some  instances  offers  opportunities  for  higher  technical  and 
professional  education."  * 

We  have  cited  this  striking  passage  in  order  to  bring  home  viv- 
idly to  the  mind  of  the  reader  the  fact  that  the  modern  city  is  a 
vast  household,  with  human  wants  and  interests  similar  to  those 
which  on  a  more  restricted  scale  absorb  the  interests  of  the  ordi- 
nary householder.  It  is  important,  however,  to  look  briefly  at 
municipal  activities  in  a  somewhat  more  prosaic  way.  If  we 
classify  the  functions  commonly  assumed  by  municipalities  either 
in  this  country  or  Europe,  paying  more  attention  to  the  newer 
and  more  debatable  functions,  —  because  it  is  these  which  give 
rise  to  real  problems,  —  we  find  that  they  fall  naturally  into  the 
following  groups:  I.  First,  the  protective  Junctions,  brought  to 
1  Frederic  C.  Howe,  The  City  the  Hope  of  Democracy,  pp.  28,  29. 


500  OUTLINES   OF  ECONOMICS 

mind  by  the  police,  the  courts,  the  fire  department.  II.  Secondly, 
those  activities  devoted  to  sanitation  and  the  public  health.  These 
functions,  which  are  exceedingly  various,  are  represented  by  mu- 
nicipal ownership  of  slaughterhouses,  ice  factories,  baths,  laun- 
dries, model  tenements,  cemeteries,  sewers,  by  municipal  garbage 
removal,  street  cleaning,  hospitals,  nurses  and  doctors,  and  in  a 
few  cities  even  by  the  ownership  and  control  of  taverns  and  sa- 
loons. III.  Charities  and  corrections.  This  group  comprehends 
not  only  the  almshouses  and  jails,  but  the  labor  colonies  and 
pawn  shops  which  are  maintained  in  a  few  European  cities. 
IV.  Educational  and  cultural;  for  example,  schools,  parks,  li- 
braries, and  museums.  V.  The  activities  included  in  this  group 
are  commercial  and  developmental.  The  educational  functions 
are  of  course  developmental;  but  the  markets,  docks,  harbors, 
streets,  bridges,  employment  and  statistical  bureaus  included  in 
this  group  are  maintained  more  for  the  purpose  of  developing 
industry  and  trade  than  the  human  mind  and  faculties.  VI. 
Municipal  monopolies;  e.g.  water,  gas,  electric  lighting,  street 
railway,  telephone  companies,  and  the  like. 

Before  considering  the  unsettled  municipal  problems  which 
center  chiefly  around  the  activities  classified  in  V  and  VI,  let  us 
examine  briefly  the  characteristics  of  the  more  economic  and  com- 
mercial functions  which  have  been  generally  assumed  by  Ameri- 
can municipalities.  Wharves  and  docks,  ferries  and  quays,  have 
been  acquired  and  their  operation  undertaken  by  the  public,  be- 
cause trade  and  commerce,  in  general,  the  whole  business  of  the 
city,  are  intimately  dependent  upon  their  proper  management  in 
the  public  interest,  while  at  the  same  time  they  give  rise  to  no 
intricate  technical  or  administrative  problems.  Much  the  same 
characteristics  mark  highways,  bridges,  and  canals.  A  few  years 
ago  many  of  the  highways  were  privately  owned.  The  State  took 
them  over,  because  the  payment  of  tolls  was  exceedingly  incon- 
venient and  hampered  commerce,  because  the  question  of  price 
or  profit  was  insignificant  in  comparison  with  the  general  public 
importance  of  free  communication,  and  because  the  management 
of  highways  and  bridges  is  comparatively  easy  and  simple.  Water- 
works likewise  are  owned  and  satisfactorily  managed  by  most  of 


ECONOMIC   ACTIVITIES   OF  MUNICIPALITIES         50! 

the  larger  American  municipalities.  Here  again  the  reasons  are 
clear.  As  in  the  case  of  streets  and  roads,  the  public  health  and 
convenience  are  so  overwhelmingly  important  in  this  connection 
that  the  question  of  price  and  profit  becomes  of  secondary  impor- 
tance, while  the  operation  of  the  industry  itself  is  simple  and  easy, 
although  the  installation  of  the  plant  may  acquire  enormous  capi- 
tal and  great  engineering  skill. 

All  these  quasi-commercial  undertakings,  then,  which  have  been 
generally  assumed  by  American  municipalities  are  characterized 
by  five  important  qualities:  (a)  all  of  them  are  natural  monopo- 
lies ;  (b)  the  interest  of  practically  the  whole  community  is  vi- 
tally dependent  upon  their  proper  operation ;  (c)  because  they 
touch  the  consumer  and  taxpayer  so  constantly,  the  quality  of 
the  service  is  incessantly  subjected  to  the  criticism  of  taxpayers 
and  voters;  (d)  in  all  of  them  profit  and  price  per  unit  of  service 
are  secondary  considerations,  wholly  outweighed  by  larger  con- 
siderations of  public  health  or  convenience,  and  (e)  all  of  them 
possess  the  "  invariable  routine-like  character  "  which  Jevons 
mentions,  and  are  capable  of  operation  by  simple,  general  rules. 

The  Present  Problem.  —  These  five  criteria  of  public  industries 
may  be  used  affirmatively,  but  not  negatively;  i.e.  it  is  logical  to 
conclude  that  any  industry  which  possesses  these  qualifications 
may  with  safety  be  assumed  by  the  public,  but  it  is  illogical  to 
infer  that  any  industry  which  does  not  possess  all  of  them  must 
be  left  to  private  management.  Indeed,  the  burning  question  of 
to-day  is  just  this:  whether  street  railways  which  are  not  easily 
managed,  and  lighting  plants  or  telephone  systems  which  are  nei- 
ther capable  of  operation  by  simple  rules  nor  so  vitally  connected 
with  the  public  welfare  as  water  companies  or  streets  and  bridges, 
should  be  municipalized.  Before  discussing  municipal  owner- 
ship and  management,  however,  it  is  necessary  to  consider  the 
alternatives  which  have  been  suggested. 

Protection  through  Competition.  —  We  mention  the  discarded 
idea  that  good  service  and  reasonable  prices  will  be  secured  by 
the  pressure  of  competition,  merely  to  emphasize  the  progress  that 
has  been  made  in  the  past  few  years.  A  generation  ago,  the  be- 
lief was  still  prevalent  that  competition  would  protect  the  public 


502  OUTLINES   OF  ECONOMICS 

from  extortion.  To-day,  it  is  everywhere  admitted  that  the  public 
industries  which  we  are  discussing  are  municipal  monopolies  above 
and  beyond  competitive  control.  Consolidation  of  competing 
companies  is  the  recognized  rule.  Practically  all  the  street  rail- 
way lines  have  been  brought  under  one  control  in  Brooklyn,  Balti- 
more, Boston,  Philadelphia,  Buffalo,  Cincinnati,  Pittsburg;  and 
in  other  cities  where  the  control  is  not  absolutely  unified,  there 
are  likely  to  be  only  two  or  three  systems  and  these  working  in 
harmony  and  cooperation.  In  1890  more  than  three  fourths  of 
the  street  railway  companies  had  less  than  ten  miles  of  line,  and 
together  such  small  lines  represented  more  than  two  fifths  of 
the  total  mileage  of  the  country.  In  1902,  however,  less  than 
half  of  the  companies  operated  less  than  ten  miles  of  line,  and  in 
all,  such  small  lines  represented  less  than  one  eighth  of  the  total 
mileage.  In  1890,  moreover,  only  two  companies  had  lines  ex- 
ceeding one  hundred  miles  in  length,  and  their  combined  mileage 
was  less  than  one  twentieth  of  the  total.  In  1892,  twenty -five 
railways  exceeded  this  limit,  and  together  they  embraced  more 
than  one  fourth  of  the  total  mileage  of  the  country.1 

Moreover,  there  has  been  a  consolidation  of  ownership  similar 
to  the  consolidation  of  plants.  Great  syndicates  have  been 
formed,  which  operate  in  many  cities  and  often  control  the  gas 
and  electric  plants  as  well  as  the  street  railway  systems.  Such 
combinations  exist  in  Pittsburg,  Baltimore,  and  many  other 
cities.  "The  Interstate  Railways  Company,  which  succeeded  the 
United  Power  and  Transportation  Company  in  1902,  controls 
about  fifteen  street  railway  systems  in  Pennsylvania,  New  Jersey, 
and  Delaware,  together  with  two  electric  light  companies.  It 
has  also  acquired  the  stock  and  franchises  of  numerous  new 
railway  companies.  Some  of  the  lines  controlled  are  more  or 
less  closely  connected,  and  others  may  be  brought  into  connec- 
tion later,  but  the  primary  purpose  has  been,  apparently,  not  so 
much  to  make  a  single  great  system  as  to  provide  a  convenient 
form  of  investment.  The  American  Railways  Company  of  Phil- 
adelphia controls  eight  or  nine  widely  separated  street  railways 
and  lighting  plants  in  Ohio,  Illinois,  New  Jersey,  and  Penn- 

1  Special  Census  Report,  Street  and  Electric  Railways,  p.  121. 


ECONOMIC   ACTIVITIES   OF  MUNICIPALITIES         503 

sylvania,  and  also  a  minority  interest  in  the  stock  of  the  Chicago 
Union  Traction  Company.  The  Railways  Company  General  con- 
trols stocks  of  seven  railway  lines,  and  lighting  plants  in  New 
York,  Pennsylvania,  and  Michigan." l 

The  franchises  now  in  the  possession  of  these  large  combina- 
tions are  of  enormous  value.  In  the  early  part  of  this  chapter 
attention  was  called  to  the  stupendous  size  of  the  American  mu- 
nicipal debt,  amounting  in  1902  to  $1,387,316,976.  The  munici- 
pal franchises  now  in  possession  of  private  corporations,  accord- 
ing to  trustworthy  computations,  exceed  in  value  the  enormous 
debt  of  our  cities;  so  that  if  the  latter  had  undertaken  these  serv- 
ices themselves,  managed  them  as  efficiently  as  the  private  com- 
panies, and  charged  the  same  prices,  they  would  now  possess 
assets  in  excess  of  their  fiscal  obligations.  Indeed,  in  many  of 
the  larger  cities  of  this  country,  the  franchises  of  the  street  rail- 
way companies  alone  exceed  in  value  the  whole  municipal  debt. 

So  rapid  has  the  movement  of  monopoly  been  in  the  industries 
under  consideration,  so  deeply  has  the  eager  struggle  for  these 
great  franchise  values  corrupted  city  government,  that  one  no 
longer  hears  of  regulation  through  competition.  The  private  cor- 
porations themselves  admit  to-day  not  only  that  services  and  prices 
must  be  regulated  by  the  public,  but  that  their  business  must  be 
taken  out  of  politics.  The  question  has  ceased  to  be:  Shall  pub- 
lic utilities  be  controlled?  It  has  become:  Can  they  be  controlled 
by  anything  short  of  municipal  ownership  and  management? 

Methods  of  Public  Regulation.  —  The  alternative  most  fre- 
quently suggested  is  public  regulation.  There  are  many  kinds 
of  regulation,  and  one  of  these  we  have  had,  potentially  at  least, 
during  the  entire  period  in  which  our  cities  have  been  pillaged 
and  our  municipal  councils  corrupted.  All  the  time  this  has  been 
going  on,  the  state  legislatures  have  had  the  right  to  regulate,  if 
they  saw  fit;  but  they  seldom  saw  fit.  General  regulation  thus 
amounts  to  nothing.  Special  methods  and  special  machinery 
must  be  devised,  if  regulation  is  to  be  made  effective. 

1 A  description  of  the  extent  of  such  combinations  together  with  other  suggestive 
details  may  be  found  in  Chapter  VIII  of  the  Census  Report,  Street  and  Electric 
Railways,  from  which  the  above  quotation  is  taken. 


504  OUTLINES   OF  ECONOMICS 

The  second  method  we  may  for  brevity  call  the  Commission 
Method,  although  the  mere  fact  that  there  is  to  be  a  commission 
amounts  to  little,  while  the  character  of  the  men  on  the  commis- 
sion and  the  manner  in  which  they  are  to  conduct  their  regulation 
amounts  to  a  very  great  deal.  Adequate  regulation  through  a 
commission,  to  our  mind,  contemplates  the  following  specific  pro- 
visions: (a)  That  cities,  at  least  of  the  larger  size,  shall  be  per- 
mitted either  to  undertake  and  manage  public  utilities  on  their 
own  account,  to  sell  or  rent  franchises  on  the  best  terms,  or  con- 
demn and  purchase  under  the  power  of  eminent  domain  the 
existing  franchises  and  property  of  public  utility  companies  pos- 
sessing perpetual  franchises;  (b)  that,  whether  under  public  or 
private  management,  public  utilities  shall,  so  far  as  possible,  be 
strictly  monopolized,  or  in  other  words,  there  shall  hereafter  be 
no  unnecessary  duplication  of  plant  for  which  consumers  are  forced 
to  pay;  (c)  that  the  service  and  charges  of  both  public  and  pri- 
vate plants  shall  be  reasonable,  any  group  (say  of  twenty-five  con- 
sumers) having  the  right  to  test  such  reasonableness  before  the 
commission;  (d)  that  to  secure  the  necessary  basis  for  a  judg- 
ment of  what  constitutes  reasonableness,  the  commission  shall 
make  a  valuation  of  all  public  utilities;  (e)  and  thereafter  exer- 
cise a  strict  control  over  extensions,  improvements,  and  the  issue 
of  new  securities;  (/)  that  the  commission  shall  inspect  the  serv- 
ice or  products  of  public  utility  companies  and  shall  introduce 
a  system  of  uniform  accounting  in  both  public  and  private  com- 
panies; (g)  and  publish  annually,  or  at  shorter  periods,  compara- 
tive statistics  of  revenue,  cost,  and  service,  in  order  that  the 
efficiency  of  public  and  private  service  may  be  contrasted. 

This  last  provision  of  publicity  is  exceedingly  important.  It 
will  not  only  spur  both  private  and  public  companies  to  make  as 
good  a  record  as  possible,  but  will  exercise  a  most  wholesome 
influence  upon  the  commission  itself.  In  Massachusetts,  for  ex- 
ample, the  Board  of  Gas  and  Electric  Light  Commissioners  has 
been  severely  censured  in  the  past  for  its  secrecy  and  failure  to 
publish  the  data  by  which  a  judgment  could  be  rendered  concern- 
ing the  reasonableness  of  the  charges  of  private  companies.  "  If 
the  Board,"  a  prominent  newspaper  once  said, ''  is  empowered  to 


ECONOMIC   ACTIVITIES   OF  MUNICIPALITIES         505 

keep  secret  what  information  it  is  pleased  to,  how  are  people  to 
know  that  they  may  not  become  a  mere  agency  of  the  monopolies 
to  cover  up  and  justify  their  possible  undue  exactions."  With 
publicity  of  a  really  adequate  kind,  this  criticism  never  would 
have  been  made. 

An  exceedingly  important  part  of  the  scheme  of  regulation  is 
that  just  as  many  difficulties  as  possible  shall  be  anticipated  and 
specifically  arranged  for  in  the  original  charter.  Regulation  thus 
becomes  largely  an  interpretation  of  accepted  principles,  not  the 
formulation  of  principles  de  novo.  New  York  City,  for  instance, 
used  its  credit  to  secure  the  construction  of  the  subway  and  then 
leased  it  to  the  Interborough  Rapid  Transit  Company  on  such 
terms  that  in  fifty  years  the  principal  and  interest  of  the  debt  will 
have  been  paid,  and  the  city  will  own  the  subway  practically 
without  expense.  Another  illustration  of  the  favorable  terms 
which  a  city  may  secure  by  careful  bargaining  is  found  in  the 
arrangement  which  the  city  of  Chicago  made  in  1907  with  the 
Chicago  City  Railway  and  the  Chicago  Union  Traction  Company. 
The  companies  not  only  agreed  to  rebuild  and  improve  the  whole 
street  railway  system,  to  provide  new  through  routes  and  addi- 
tional transfers,  and  to  operate  under  a  license  revocable  at  any 
time  by  the  city  upon  payment  of  the  agreed  value  of  the  roads 
plus  the  cost  of  improvements,  but  the  city  is  to  exercise  a  large 
degree  of  control  over  the  frequency  of  the  service  and  supervise 
rigidly  the  accounts  of  the  company,  while  all  profits  above  5 
per  cent  on  the  actual  investment  are  to  be  shared  between  the 
city  and  the  railways,  55  per  cent  to  the  former  and  45  per  cent  to 
the  latter.1 

We  cite  these  examples  partially  to  show  that  our  cities  are 
gradually  learning  to  drive  better  bargains  with  the  corporations 
than  in  the  past,  but  principally  to  emphasize  the  fact  that  such 
freedom  of  contract  would  be  perfectly  possible  under  the  com- 
mission form  of  regulation,  and  would  at  the  same  time  facilitate 

1  In  speaking  of  these  terms  as  "favorable,"  we  merely  mean  more  advanta- 
geous to  the  city  than  has  usually  characterized  the  franchise  grants  of  the  past. 
In  this  particular  case  it  is  possible  that  Chicago  might  have  obtained  even  better 
terms,  or  that  municipal  ownership  and  management  might  have  been  the  wisest 
solution  of  the  problem. 


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508  OUTLINES   OF   ECONOMICS 

cities  supplied  more  consumers  and  charged  on  the  average  lower 
rates  than  the  private  companies.  Similarly,  in  the  United  States, 
a  large  majority  of  the  water  works  are  now  owned  by  municipali- 
ties, while  in  1902  the  municipalities  owned  815  out  of  the  3620 
central  electrical  stations,  employing  2467  out  of  the  23,330  wage 
earners  employed,  and  supplying  195,904,439  out  of  the  aggre- 
gate 2,507,051,115  kilowatt  hours  of  power.  At  first  blush,  it 
would  appear  that  the  safest  arguments  for  or  against  municipal 
ownership  might  be  derived  from  a  comparative  study  of  munici- 
pal and  private  operation.  Such,  however,  is  not  the  case.  Owing 
to  the  predominating  importance  of  technical  questions  in  such 
comparisons,  none  but  expert  engineers  or  accountants  are  com- 
petent to  draw  conclusions,  and  unfortunately  the  conclusions  of 
the  experts  are  in  hopeless  conflict.  The  expert  representatives  of 
the  private  companies  return  from  their  study  of  public  manage- 
ment with  their  opinions  unchanged;  while  the  expert  defendants 
of  municipal  ownership  find  in  the  results  of  English  or  American 
municipalization  little  but  confirmation  of  their  existing  opin- 
ions. In  fact,  we  are  forced  back  upon  more  or  less  general 
considerations. 

If  we  carefully  examine  the  important  arguments  in  favor  of 
municipal  management,  we  shall  find  that  many  of  them  assume 
that  regulation  of  the  character  previously  described  is  impossible, 
(a)  The  most  emphasis  is  placed  by  defendants  of  municipal 
management  upon  the  fact  that  private  ownership  in  the  past  has 
resulted  in  widespread  political  corruption.  No  one,  to-day,  de- 
nies this  truth.  But  never  in  the  past  have  we  attempted  the  kind 
of  regulation  which  we  may  expect  in  the  future,  and  which  has 
already  been  started,  though  not  perfected,  in  the  states  of  New 
York  and  Wisconsin.  This  species  of  regulation  contemplates  a 
valuation  of  public  and  private  plants,  with  prevention  of  stock 
watering  and  reduction  of  profits  to  a  reasonable  level.  If  we 
can  sell  or  rent  franchises  (not  give  them  away),  prevent  the  capi- 
talization of  excessive  profits,  and  keep  dividends  on  a  rational 
basis,  the  raison  d'etre  of  bribery  and  corruption  disappears. 
Corporations  cannot  afford  to  pay  bribes  for  the  opportunity  of 
earning  reasonable  profits. 


ECONOMIC   ACTIVITIES   OF  MUNICIPALITIES 


509 


(6)  The  second  great  argument  for  municipal  management  is 
that  it  will  improve  the  public  service  by  increasing  its  extent, 
dignity,  and  importance.  This  position  is  probably  well  taken. 
The  supreme  necessity  for  judicial  purity  has  given  us  pure  courts. 
The  supreme  necessity  for  decent  management  of  public  utilities, 
if  they  were  undertaken  by  our  municipal  governments,  would, 
it  is  probable,  give  us  decent  management.  Certainly,  at  least, 
every  one  agrees  that  it  would  be  suicidal  to  introduce  municipal 
management  without  putting  it  on  a  civil  service  basis. 

(c)  The  next  characteristic  of  public  industry  is  as  often  cited 
against  as  in  favor  of  municipal  management.     Except  for  high- 
class  salaried  men,  where  the  reverse  is  true,  the  State  treats  its 
employees  unusually  well,  paying  larger  wages  for  shorter  hours 
of  labor  than  most  private  employers.    This  will  appear  as  a  vir- 
tue or  defect,  according  to  our  viewpoint.     If  we  believe  that 
the  State  should  be  a  model  employer,  and  pay  fair  living  wages 
whether   private  employers  do  so  or  not,  this  characteristic  of 
municipal  management  will  appear  as  a  strong  reason  for  its 
introduction.     If,  on  the  other  hand,  we  concentrate  our  thoughts 
on  cheapness  of  production,  and  neglect  all  considerations  of  the 
welfare  of  the  producers,  we  must  score  a  point  under  this  head 
in  favor  of  private  operation. 

(d)  One  of  the  strongest  charges  against  municipal  ownership 
is  based  upon  the  fairness  and  humanity  which  the  State  shows 
in  dealing  with  its  employees.     It  is  charged  that  such  treatment 
tends  to  corrupt  the  public  servant,  and  to  destroy  his  political 
independence,   making  him  a  subservient   henchman   and  sup- 
porter of  the  administration  under  which  he  happens  to  be  work- 
ing.   That  there  is  danger  of  such  "pernicious  activity"  on  the 
part  of  office  holders,  no  reasonable  student  of  public  affairs  will 
deny.     In  the  recent  Chicago  city  campaign,  when,  as  it  happened, 
municipal  ownership  was  the  burning  issue,  the  head  of  the  police 
department  attempted,  and  partially  succeeded,  in  forcing  almost 
the  entire  police  force  to  work  for  the  election  of  one  of  the  can- 
didates.    But  this  candidate  was   defeated,  despite  the  police, 
and  the  police  official  is  at  the  present  writing  under  criminal 
indictment. 


510  OUTLINES   OF  ECONOMICS 

This  rebuke  of  police  interference  is  of  crucial  import.  It  calls 
attention  to  the  fact  that  American  voters  have  learned  to  resent 
such  interference.  In  scores  of  city  elections  in  the  last  five  years 
the  independent  political  sense  of  the  people  has  triumphed  over 
office-holding  cliques  who  attempted  to  perpetuate  their  sway; 
and  not  only  has  the  electorate  shown  its  ability  to  control  the 
office  holders,  but  with  every  year  it  has  become  more  and  more 
difficult  for  political  bosses  to  dictate  to  the  office  holders  them- 
selves. Without  civil  service,  of  course,  municipal  management  is 
unworthy  of  consideration.  With  it,  however,  the  whole  sting  of 
this  criticism  vanishes.  Not  only  will  public  employees  cease  to 
be  of  one  political  faith,  but  the  better  conditions  of  employment 
offered  by  the  State  will  probably  cease  to  make  a  petty  grafter 
of  the  public  employee.  The  reason  for  the  last  statement  is 
plain.  If  the  State  pays  $4.00  a  day  for  carpenters,  while  private 
employers  offer  but  $3.00,  the  $1.00  difference  may  have  either 
of  two  effects:  under  the  spoils  system,  it  will  go  to  indifferent 
or  average  workmen  in  the  form  of  a  pauperizing  bounty;  but 
under  the  merit  system,  it  will  bring  to  the  State  the  best  skill 
in  the  occupation.  Better  conditions  of  employment,  where 
the  merit  system  prevails,  merely  "concentrate  competition  upon 
efficiency." 

Moreover,  it  may  be  remarked  that  it  is  not  open  to  opponents 
of  municipal  ownership  to  assert  that:  "all  this  argument  pre- 
supposes appointment  by  merit,  but  we  have  not  yet  succeeded 
in  introducing  the  merit  system."  Such  an  argument  may  be 
turned  against  its  supporters  by  the  countercharge,  which  is 
equally  true,  that  we  have  not  yet  succeeded  in  introducing  the 
advanced  form  of  public  regulation  which  is  the  only  salvation 
and  the  last  defense  of  the  adherents  of  private  management.  In 
point  of  fact,  the  whole  discussion  of  municipal  management  pre- 
supposes certain  reasonable  improvements  both  in  the  character 
of  public  regulation  and  the  character  of  the  public  service;  for 
unless  we  can  regulate  public  utility  companies  far  more  satisfac- 
torily than  we  have  done  in  the  past,  we  shall  unquestionably  and 
inevitably  come  to  municipal  management. 

(e)   Finally,  there  is  another  fundamental  characteristic  of  pub- 


ECONOMIC  ACTIVITIES   OF  MUNICIPALITIES        511 

lie  management  which  we  shall  regard  as  a  virtue  or  defect  accord- 
ing to  our  political  philosophy.  Under  private  ownership,  prices 
are  determined  by  considerations  of  profit;  and  persons  who  can- 
not afford  to  pay  the  price  of  the  service  must  go  without  it, 
although  they  may  be  sadly  in  need  of  it.  Under  public  manage- 
ment, however,  rates  are  determined  by  general  social  utility  and 
are  frequently  placed  at  less  than  the  cost  of  services.  Where 
this  happens,  part  of  the  expense  of  maintaining  the  industry  falls 
upon  the  general  body  of  taxpayers,  and  it  must  be  remembered 
in  this  connection  that  probably  a  majority  of  the  voters  of  the 
present  time  pay  no  direct  taxes.  To  persons  of  broad  social  sym- 
pathies, confident  of  the  honesty  of  democracy  and  anxious  to 
turn  the  powers  of  the  State  to  ameliorating  the  lot  of  the  poor  and 
unfortunate,  this  prospect  of  modifying  charges  by  considerations 
of  social  policy  offers  no  terrors.  To  reduce  street-car  fares,  for 
instance,  during  the  hours  when  our  poorly  paid  workmen  are 
riding  to  their  work,  and  in  general  to  adjust  prices  so  as  to  sub- 
serve the  highest  social  welfare,  appears  as  an  honorable  oppor- 
tunity, not  as  a  dishonorable  temptation.  To  persons  of  a  harsher 
social  creed  and  a  more  pessimistic  social  philosophy,  however, 
the  adjustment  of  rates  to  the  greatest  good  of  the  greatest  number 
seems  pernicious  and  dangerous. 

Whether  public  management  can  fairly  be  expected  to  be  as 
efficient  and  progressive  as  private  management  is  a  question 
which  does  not  lend  itself  to  brief  discussion.  At  present, 
however,  we  are  unquestionably  in  an  experimental  stage;  and 
it  is  desirable  not  only  that  the  commission  plan  shall  be  given 
a  thorough  trial,  but  that  public  ownership  and  operation  shall  be 
tested  under  such  conditions  as  to  enable  an  intelligent  compari- 
son to  be  made  with  the  results  of  private  management.  States 
having  a  commission  empowered  to  enforce  uniform  accounting 
will  constitute  great  economic  laboratories  in  this  connection  during 
the  next  quarter  of  a  century.  In  the  end,  however,  it  may  be 
that  less  emphasis  will  be  placed  upon  cost  of  service  and  more 
emphasis  upon  considerations  of  general  social  welfare  than 
is  now  done.  Even  if  it  shall  transpire  that  private  management 
under  a  state  commission  is  cheaper  and  more  progressive  than 


512  OUTLINES   OF  ECONOMICS 

public  management,  the  latter  will  still  have  a  strong  case  in  the 
plea  that  it  adapts  the  service  to  the  greatest  social  welfare,  abol- 
ishes the  struggle  between  the  franchise  corporations  and  the  pub- 
lic, dignifies  municipal  government,  and,  by  enlarging  the  public 
interests  of  the  people,  breeds  in  them  a  finer  spirit  of  cooperation 
and  a  deeper  sense  of  social  solidarity.  At  bottom  this  question 
is  not  so  much  economic  as  social;  and  in  the  end  that  method 
of  management  will  prevail  that  best  subserves  the  social  well- 
being,  not  that  method  of  management  which  is  cheapest. 

Municipal  Home  Rule.  — The  problem  of  municipal  ownership, 
as  has  been  suggested,  presents  a  contest  between  the  highest  form 
of  regulation  which  we  can  reasonably  expect  versus  the  best  spe- 
cies of  municipal  management  which  we  are  justified  in  anticipat- 
ing. It  is  a  conflict  of  potentialities.  Whatever  its  outcome,  there 
is  one  important  step  which  should  be  taken  at  once :  cities  should 
be  endowed  with  the  power  of  introducing  municipal  manage- 
ment, if  they  wish  to  try  the  experiment.  In  many  cities  to-day 
private  corporations  have  secured,  often  by  bribery,  perpetual 
franchises  in  which  rates  and  other  conditions  are  authorized  that 
are  manifestly  unjust  to  the  public.  In  such  a  situation  the  city 
can  do  nothing  but  condemn,  or  threaten  to  condemn,  the  fran- 
chise and  property  under  its  powers  of  eminent  domain.  Munici- 
pal ownership,  or  the  threat  of  municipal  ownership,  under  which 
the  corporation  might  possibly  acquiesce  in  reasonable  regulation 
offers  the  only  remedy  for  this  condition  of  affairs. 

Worse  than  the  above  situation,  however,  is  the  utter  helplessness 
of  those  city  governments  which  can  neither  undertake  the  opera- 
tion of  public  utilities  themselves,  nor  regulate  the  rates  and  serv- 
ice of  the  private  companies  which  control  them;  while  the  state 
legislature,  which  has  retained  the  power  of  regulation,  does  noth- 
ing. This  deadlock  delivers  over  the  city  bound  and  captive  into 
the  hands  of  the  corporations.  Even  if  the  city  decides  to  sell  or 
rent  its  new  franchises,  even  if  it  prefers  the  conservative  policy  of 
private  management,  it  cannot  dispose  of  its  valuable  rights  to 
the  best  advantage,  unless  it  possesses  the  alternative  of  public 
management  with  which  to  force  the  hand  of  the  corporation. 
It  is  sometimes  thought  that  by  offering  franchises  to  the  highest 


ECONOMIC   ACTIVITIES   OF  MUNICIPALITIES         513 

bidder,  competition  among  private  corporations  will  bring  reason- 
able and  remunerative  offers.  This,  however,  is  not  the  case. 
The  only  bidder  in  most  instances  is  the  corporation  already  in 
power,  and  where  competitive  bidding  is  required  by  law,  "the 
local  governments  have  obtained  no  more  favorable  terms  than 
were  prescribed  as  a  minimum  by  state  or  local  legislation.  The 
reason  is  obvious.  The  proposed  franchise  is  almost  invariably 
petitioned  for  in  the  first  instance  by  a  duly  organized  corpora- 
tion, which  asks  the  right  to  occupy  specifically  named  streets, 
and  which  has  carefully  considered,  in  advance,  construction  plans 
and  probably  financial  results.  Even  when  a  considerable  period 
of  time  is  allowed  for  others  to  investigate  the  proposed  plan  and 
to  estimate  the  value  of  the  franchise,  these  possible  competitors 
are  at  a  great  disadvantage  as  compared  with  the  original  pro- 
moters. It  often  happens  that  there  are  few  people  in  a  city  who 
are  familiar  with  the  street-railway  business  and  at  the  same  time 
in  command  of  the  necessary  capital.  Effective  competition  is 
still  less  likely  when  the  proposed  railway  is  in  the  nature  of  an 
extension  or  outlying  line,  the  success  of  which  will  depend  almost 
wholly  upon  cooperation  with  existing  lines.  The  process  of  con- 
solidation among  street  railways  has  gone  so  far  in  most  large 
cities  that  there  is  only  one  important  system  in  existence  with 
which  a  new  railway  can  be  connected." l 

QUESTIONS 

1.  What  connection  is  there  between  governmental  activity  and  popula- 
tion ?     Explain. 

2.  What  is  the  essential  characteristic  of  municipal  government  ? 

3.  Classify  the  functions  commonly  exercised  by  cities,  and  enumerate 
the  most  significant  characteristics  which  they  possess  in  common. 

4.  What  has  been  the  most  fertile  source  of  political  corruption  in  cities? 
Would  it  disappear  with  adequate  regulation  ? 

5.  Why  has  general  regulation  been  ineffective? 

6.  Under  a  system  of  adequate  regulation,  would  it  be  desirable  to  en- 
courage monopoly  by  chartering  only  one  company  with  an  indeterminate 
franchise  ?     Why  ? 

7.  Is  it  desirable  that  charters  should  contain  specific  provisions  respect- 
ing taxes,  rates,  and  quality  of  service?    Why? 

1  Census  Report,  "Street  and  Electric  Railways,  1902,"  p.  128. 
2L 


514  OUTLINES   OF  ECONOMICS 

8.  Under  a  proper  system  of  regulation,  would  the  increase  in  franchise 
values  owing  to  growth  of  population  and  wealth  (the  unearned  increment) 
benefit  the  public  or  the  private  company  ? 

9.  Would  municipal  plants  pay  taxes  under  existing  tax  laws?     Should 
they  pay  such  taxes? 

10.  Assuming  that  the  poorer  classes  pay  a  larger  share  of  their  income 
for  street-railway  transportation  than  the  wealthier  classes,  would  it  be  de- 
sirable for  private  companies  to  earn  large  profits,  even  if  such  profits  were 
turned  over  in  whole  or  part  to  the  city  government  ? 

n.  Under  the  same  hypothesis,  would  it  be  legitimate  for  a  municipal 
street  railway  to  charge  passengers  less  than  cost,  meeting  the  deficit  by  tax 
levies  ? 

12.  What  advantages  are  possible  from  municipal  management  that  can- 
not be  secured  from  private  operation  under  good  regulation  ? 

13.  Why  should  municipalities  be  granted  the  option  of  acquiring  and 
managing  the  public  utilities? 

REFERENCES 

BEMIS,  E.  W.,  and  others.     Municipal  Monopolies. 

DARWIN,  L.     Municipal  Trade,  passim. 

ELY,  R.  T.     Evolution  of  Industrial  Society,  Part  II,  Chap.  V,  "Municipal 

Ownership  of  Natural  Monopolies,"  pp.  225-254. 
FOOTE,  A.  R.     Municipal  Public  Service  Industries. 
HOWE,   F.   C.     The  City  the  Hope  of  Democracy,  passim.      "Municipal 

Ownership  in  Great  Britain,"  Bulletin  of  the  [U.S.]  Bureau  of  Labor 

No.  62,  January,  1906. 
JOHNSON,  E.  R.     "Public  Regulation  of  Street  Railway  Transportation," 

Annals  of   the   American   Academy  of   Political   and   Social   Science, 

March,  1907,  pp.  31-47. 

Municipal  A/airs,  Vol.  IV,  No.  i,  1900;  and  Vol.  VI,  No.  4,  1002-1903. 
POND,  O.  L.     "Municipal  Control  of  Public  Utilities,"  Columbia  Studies 

in  History,  Economics,  and  Public  Law,  Vol.  XXV. 
Proceedings  of  the  Annual  Meetings  of  the  National  Municipal  League. 
Report  of  the  London  Commission  on  London  Traffic,  1905. 
Report  of  the  Special  Committee  of  the  State  of  Massachusetts,  1898 :  "  The 

Relations  between  Cities  and  Towns  and  Street  Railway  Companies." 
Special  Census  Report,  Street  and  Electric  Railways,  1002. 
Special  Census  Report,  Telephones  and  Telegraphs,  1002. 
Special  Census  Report,  Central  Electric  Light  and  Power  Stations,  1902. 
United  States  Supreme  Court  Reports,  Vol.  143,  p.  339.     San  Diego  Land 

Co.  vs.  National  City,  etc. 


CHAPTER    XXX 
SOCIALISM 

Socialism  Defined.  —  Socialists  seek  the  establishment  of  in- 
dustrial democracy  through  the  instrumentality  of  the  State. 
Our  political  organization  is  to  become  also  an  economic  industrial 
organization.  Socialism  contemplates  an  expansion  of  the  busi- 
ness functions  of  government  until  the  more  important  businesses 
are  absorbed.  Private  property  in  profit-producing  capital  and 
rent-producing  land  is  to  be  abolished.  Socialists  make  no  war 
upon  capital;  what  they  object  to  is  the  private  capitalist.  They 
desire  to  socialize  capital  and  to  abolish  capitalists  as  a  distinct 
class.  Their  ideal,  then,  is  not,  as  is  supposed  by  the  uninformed, 
an  equal  division  of  existing  wealth,  but  a  change  in  the  funda- 
mental conditions  governing  the  acquisition  of  incomes. 

Socialists  usually  say  that  labor  creates  all  wealth.  No  rational 
socialist  means  thereby  to  deny  that  land  and  capital  are  factors 
of  production,  but  as  these  are  passive  factors,  they  hold  that  their 
owners  ought  not  to  receive  a  share  of  the  product  unless  they 
personally  are  useful  members  of  the  community.  Labor  is.  the 
active  factor,  and  all  production  is  carried  on  for  the  sake  of  man. 
Land  and  capital  are  simply  the  tools  of  man.  Socialists  admit 
that  the  owners  of  these  tools  must  receive  a  return  for  them  when 
industry  is  organized  as  it  is  now;  hence  they  desire  that  these 
tools  should  become  public  property.  They  wish  to  make  of  uni- 
versal application  the  command  of  the  Apostle  Paul,  "  If  a  man 
will  not  work,  neither  let  him  eat." 

Distributive  Justice.  —  Socialists,  in  common  with  a  great  many 
other  people  who  do  not  accept  their  attitude  toward  the  organiza- 
tion of  industry,  desire  distributive  justice.  As  to  what  constitutes 
justice  they  are  not  wholly  agreed,  but  there  is  among  them  a 
tendency  to  accept  equality  or  needs  as  a  basis  rather  than  produc- 

5*5 


516  OUTLINES    OF   ECONOMICS 

tivity.  Some,  it  is  true,  have  advocated  an  almost  mechanical 
equality,  but  most  socialists  to-day  would  regard  the  question  of 
a  precise  standard  for  the  distribution  of  income  as  not  of  present 
importance.  They  are  simply  agreed  in  this,  that  the  distribution 
of  the  present  day  is  wholly  unjust.  They  think  that  men  to-day 
do  not  have  equal  chances  in  life,  that  there  is  too  much  privilege. 
The  big  rewards,  they  think,  to-day  go  to  those  who  are  shrewd 
and  cunning,  who  are  skillful  in  manipulating  stocks  and  bonds, 
or  who  are  favored  by  inheritance  with  a  good  start,  rather  than 
to  those  who  render  great  social  service.  The  inventors,  poets, 
authors,  scientists,  skilled  mechanics,  and  factory  managers,  they 
allege,  are  the  large  producers,  but  they  do  not  get  the  big  prizes. 

Varieties  of  Socialism. — The  foregoing  characterization  ap- 
plies to  most  persons  who  have  been  called  socialists,  but  the  genus 
contains  a  number  of  species  which  should  be  distinguished. 

(i)  One  group  has  been  called  "  Utopian."  There  are  those 
who  might  object  to  this  term  on  the  ground  that  all  of  them  are 
Utopian.  Nevertheless,  some  are  more  so  than  others.  This  first 
group  contains  those  who  have  become  impressed  with  the  evils 
of  the  present  competitive  system  and  propose  the  collective  owner- 
ship of  the  means  of  production  as  a  remedy,  in  much  the  same 
spirit  with  which  a  physician  writes  a  prescription  to  cure  his 
patient.  There  have  been  many  attempts  to  picture  to  us  how 
smoothly  things  would  proceed  if  men  could  only  be  persuaded 
to  try  the  collective  ownership  of  land  and  capital.  As  a  type  of 
this  class  we  may  take  Robert  Owen.  His  life  was  contemporane- 
ous with  the  Industrial  Revolution  in  England,  he  himself  being  a 
successful  manufacturer.  He  saw  with  his  own  eyes  the  evils 
of  unrestricted  competition,  and  was  filled  with  an  earnest  desire 
to  better  the  condition  of  the  working  classes.  He  is  remembered 
as  a  factory  reformer  and  promoter  of  voluntary  cooperation,  but 
yet  he  regarded  these  efforts  as  not  sufficiently  radical.  He  thought 
human  nature  must  be  reformed  by  careful  training  from  child- 
hood in  an  atmosphere  of  association,  instead  of  the  self-seeking, 
commercial  atmosphere  which  surrounded  him.  He  spent  his 
large  fortune  in  an  attempt  to  carry  out  his  ideas  regarding  the 
reconstruction  of  society.  Among  his  projects  was  the  founding 


SOCIALISM  517 

of  a  colony  at  New  Harmony,  Indiana,  where  no  private  property 
or  competition  should  exist.  After  a  continuance  of  two  years, 
the  experiment  ended,  as  most  other  similar  enterprises  have,  a 
complete  failure.  In  this  group  would  also  be  placed  Saint- 
Simon,  Fourier,  Cabet,  Blanc,1  and  Bellamy. 

(2)  The   "  Marxian  "   socialists   call   themselves   "  scientific," 
as  distinguished  from  the  idealistic  writers  just  mentioned.    They 
insist  that  they  have  no  cure-all  for  the  ills  of  society.     Socialism 
in  their  eyes  is,  in  the  main,  only  an  explanation  of  what  is  happen- 
ing.   The  private  capitalistic  system  is  breaking  down,  they  say, 
and  the  logical  result  must  be  the  collective  ownership  of  the 
means  of  production  as  the  next  stage  in  social  evolution.    They 
say  that  setting  aside  all  question  of  "  ought  "  or  "  desirability," 
collective  ownership  is  coming,  and  we  might  as  well  adjust  our- 
selves to  it.    The  four  leading  features  of  the  Marxian  philoso- 
phy are:  (a)  the   study  of   society  as  an  evolutionary  product ; 
(b)  the  economic   interpretation  of   history,  according  to  which 
our  whole  social  life,  including  our  ideas  concerning  religion,  art, 
marriage,  etc.,  are  but  a  reflex  of  past  and  present  economic 
conditions;    (c)  the  doctrine  of  surplus  value,  according  to  which 
the  income  of  the  capitalist  class  does  not  represent  a  return  for 
abstinence,  but  results  from  the  fact  that  through  their  ownership 
of  the  means  of  production  they  can  compel  the  laboring  class  to 
work  for  them  a  longer  number  of  hours  than  is  necessary  to  pro- 
duce the  wages  which  the  laborers  receive.     What  is  produced  in 
this  additional  number  of  hours  is  the  source  of  capitalist  income; 
and  (d)  the  doctrine  of  the  class  struggle,  which  finds  a  deep  antag- 
onism between  the  capitalist  class  and  the  laboring  class,  that 
can  only  result  in  the  overthrow  of  the  capitalist  class  and  the  tri- 
umph of  the  laboring  class.    Most  socialists  now  believe  that  this 
victory  will  be  won  without  bloodshed,  as  a  result  of  a  gradual 
increase  in  the  strength  of  the  socialist  party  as  a  political  organiza- 
tion. 

(3)  The   Fabian    Socialists,   of    whom   the   members    of  the 
Fabian  Society  of  England  are  types,  have  disapproved  both  of  the 

1  Louis  Blanc  was  less  "  Utopian  "  than  the  others.    He  was  transitional  and 
in  reality  paved  the  way  for  the  German  and  later  "scientific"  movement. 


518  OUTLINES   OF   ECONOMICS 

founding  of  Utopian  settlements  and  of  the  philosophy  of  Marx. 
The  aim  of  this  society  has  been  to  spread  socialistic  ideas  by 
the  dissemination  of  knowledge  on  the  subject,  rather  than  by  an 
organized  political  movement,  advocating  this  or  that  reform  as 
opportunity  indicated.  The  membership  has  come  largely  from 
the  educated  middle  class,  and  has  never  been  very  large,  although 
the  society  has  exercised  considerable  influence.  Practically, 
some  of  the  conservative  members  of  the  Marxian  school,  such 
as  Bernstein,  in  Germany,  and  Jaur^s,  in  France,  do  not  differ 
greatly  from  the  Fabians. 

The  following  words  of  Jaures  on  the  method  of  realizing  the 
socialist  ideal  are  of  interest  in  this  connection :  — 

"All  Socialists,  indeed,  some  openly,  others  with  infinite  precautions,  some 
with  a  mischievous  Viennese  good-nature,  declare  it  to  be  untrue  that,  taken 
as  a  whole,  the  economic  material  condition  of  the  proletariat  is  getting  worse 
and  worse.  It  must  be  conceded,  after  taking  account  of  the  tendency  to 
sink  and  the  tendency  to  rise,  that  in  the  immediate  reality  of  life,  the  tendency 
to  sink  is  not  the  stronger.  Once  this  has  been  granted,  it  is  no  longer  pos- 
sible to  repeat  after  Marx  and  Engels  that  the  capitalist  system  will  perish 
because  it  does  not  insure  to  those  whom  it  exploits  the  minimum  necessities 
of  life.  It  follows  from  the  same  admission  that  it  has  also  become  puerile 
to  expect  that  an  economic  cataclysm,  menacing  the  proletariat  in  its  very 
existence,  will  bring  about,  by  the  revolt  of  the  instinct  of  self-perservation, 
the  '  violent  overthrow  of  the  bourgeoisie.' 

"It  is  not  by  an  unexpected  counter-stroke  of  political  agitation  that  the 
proletariat  will  gain  supreme  power,  but  by  the  methodical  and  legal  organi- 
zation of  its  own  forces  under  the  law  of  the  democracy  and  universal  suffrage. 
It  is  not  by  the  collapse  of  the  capitalistic  bourgeoisie,  but  by  the  growth  of 
the  proletariat,  that  the  Communist  order  will  gradually  install  itself  in  our 
society."  l 

(4)  The  Christian  socialists.  About  the  middle  of  the  nine- 
teenth century,  such  men  as  Kingsley,  Maurice,  and  Hughes  in 
England  were  much  impressed  by  the  misery  of  the  poor,  arid  they 
attacked  the  competitive  system  as  being  responsible  for  the  evils 
which  they  saw.  Voluntary  cooperation  and  the  elevation  of  the 
workingman's  character  seemed  to  them  the  proper  remedies. 
Thus  their  theories  hardly  fall  under  the  head  of  socialism  as  we 
have  defined  the  term.  In  Germany  and  France,  also,  social 

1  Studies  in  Socialism  (trans,  by  M.  Minturn),  pp.  167-169. 


SOCIALISM  519 

movements  have  been  organized  by  adherents  of  both  Protestant 
and  Catholic  Churches.  In  the  United  States  all  shades  of  opinion 
have  been  included  under  Christian  socialism,  but  the  term  should 
apply  only  to  those  who  advocate  the  collective  ownership  of  the 
means  of  production  on  the  ground  primarily  that  this  is  required 
by  the  teaching  of  the  Christian  religion. 

(5)  State  socialism  is  a  term  frequently  used  in  German  dis- 
cussion to  designate  those  who  favor  an  extension  of  the  economic 
functions  of  government  without  any  great  change  in  existing 
class  relations. 

(6)  "  Socialists  of  the  chair  "  (Kathedersozialismus)  refers  to 
the  university  professors  who  have  advocated  State  interference 
with  property  rights  to  any  extent  demanded  by  public  welfare, 
and  have  opposed  the  extreme  laissez-faire  doctrines  of  the  older 
economists.    These  men  are  not  to  be  classed  as  socialists,  the 
term  being  used  as  a  reproach  by  their  conservative  opponents, 
and  the  designation  has  now  chiefly  historical  significance. 

Communism.  —  Communism  was  the  term  employed  by  Karl 
Marx  to  distinguish  his  own  philosophy  from  the  " Utopian" 
schemes  of  such  men  as  Owen,  which  he  termed  socialistic.  But 
to-day  the  reverse  has  become  the  common  usage.  Communism 
now  very  generally  signifies  the  abolition  of  private  property  not 
only  in  production  goods,  but  also  in  consumption  goods,  whereas 
socialists  contemplate  the  retention  of  private  property  in  income. 
In  this  case  there  would  be  provision  of  private  property  for  every 
one,  and  in  this  respect  socialists  emphasize  and  extend  the  idea 
of  private  property. 

Socialism  an  Extension  of  Existing  Institutions.  —  Our  govern- 
ment owns  the  post  office;  most  governments  the  telegraph. 
Nearly  all  own  the  wagon  roads.  Some  own  the  canals  and  rail- 
ways. Many  governments  own  factories.  Probably  every  na- 
tional government  does  at  least  a  little  manufacturing.  Most 
governments  cultivate  forests,  and  some  cultivate  arable  land. 
We  have  only  to  imagine  an  extension  of  what  already  exists  until 
government  enterprise  dominates  in  manufactures,  mining,  trans- 
portation, commerce,  and  carries  on,  in  short,  most  productive 
enterprises,  and  we  have  socialism  pure  and  simple. 


520  OUTLINES    OF   ECONOMICS 

But  saying  that  socialism  is  an  extension  of  existing  institutions 
may  lead  to  a  misconception.  The  elimination  of  private  capital- 
ism is  supposed  to  work  a  most  radical  change  in  many  branches 
of  our  social  life.  The  commercial  spirit  would  be  abolished,  and 
with  it  all  that  is  dependent  upon  it.  We  are  trained,  it  is  alleged, 
to-day  from  childhood  up  to  try  to  "make  money,"  and  this  ac- 
centuates the  selfish  elements  in  our  nature;  and  it  is  therefore 
maintained  that  our  present  system  does  nothing  to  promote,  and 
does  much  to  hinder,  the  development  of  the  brotherly  spirit. 

The  Strength  of  Socialism.  —  Socialism  makes  perhaps  its 
strongest  claim  in  its  plea,  first,  for  a  scientific  organization  of  the 
productive  forces  of  society,  and  second,  for  a  just  distribution  of 
the  annual  social  income.  It  is  said  that  the  present  production 
of  economic  goods  is  small  in  proportion  to  population,  but  the 
socialist  replies,  "Naturally  enough.  Competition  is  wasteful. 
Two  railways  are  built  where  one  would  suffice.  Two  trains  run 
parallel  between  two  cities  where  one  would  serve  the  public  equally 
well.  Three  times  as  many  milk  wagons,  horses,  and  drivers  are 
required  to  serve  the  people  with  milk  as  would  suffice  if  the  milk 
business  were  organized  like  the  mail  distribution  in  cities.  Look 
at  the  shops,  wholesale  and  retail,  and  see  the  waste  of  human 
force.  Without  competition,  the  whole  dry  goods  and  grocery 
business  could  be  carried  on  with  a  third  of  the  present  economic 
expenditure  of  force.  Reflect  on  all  the  idle  classes  in  modern 
society.  Socialism  would  set  everybody  to  work,  and,  making 
each  one  dependent  on  his  own  exertions  for  success,  would  stimu- 
late all  energies."  The  argument  is  a  telling  one,  but  it  does  not 
prove  its  point  unless  we  grant  that  the  present  waste  and  idle- 
ness cannot  be  suppressed  or  greatly  diminished  without  a  depar- 
ture from  the  fundamental  principles  of  our  present  industrial 
order,  or  that  the  waste  and  idleness  are  not  counterbalanced  by 
advantages. 

Justice  is  a  strong  plea  in  the  socialist  philosophy.  It  cannot 
be  for  one  moment  claimed  that  each  one's  income  is  at  present 
in  proportion  to  his  services  to  humanity.  Income  in  proportion 
to  industrial  merit  is  attractive  to  an  ethical  sentiment.  But  can- 
not we  approximate  justice  in  distribution  on  the  basis  of  the  exist- 


SOCIALISM  521 

ing  order?  There  is  nothing  distinctively  socialistic  about  the 
desire  for  distributive  justice.  It  is  a  feeling  that  actuates  those 
who  work  for  the  control  of  monopolies  and  corporations,  for  tax 
reform,  regulation  of  inheritances,  etc.  The  socialist  simply  differs 
from  these  people  in  his  method  of  attaining  his  ideal. 

The  socialist  criticism  of  the  present  regime  is  especially  severe 
in  the  matter  of  unemployment.  There  are  always  some  men 
who  are  able  and  willing  to  work,  who  are  out  of  jobs,  and  periodic- 
ally, with  the  coming  of  crises  and  depressions,  the  lack  of  em- 
ployment becomes  widespread.  There  is,  of  course,  no  lack  of 
need  for  additional  goods;  the  difficulty  is  entirely  a  matter  of 
business  organization.  Again,  it  is  urged  that  to-day  goods  are 
made  for  sale,  not  for  use,  as  they  would  be  under  the  socialistic 
regime.  Adulteration,  deception,  and  "cheap  and  nasty"  goods 
are  the  direct  outcome  of  a  system  of  private  capitalism.  In  the 
socialistic  state  we  are  told  the  business  of  the  shopkeeper  is  to 
help  you  find  what  you  really  need;  at  the  present  time  it  is  to 
his  interest  to  persuade  you  to  buy  what  you  do  not  need  or  what 
will  give  him  the  greatest  profit.  The  spirit  of  competition  is  to 
the  socialist  simply  warfare.  In  every  business  establishment  a 
good  deal  of  the  most  highly  paid  labor  is  devoted,  not  to  the  pro- 
duction of  goods,  but  to  finding  a  market.  Ability  to  fight  one's 
competitor  is  quite  as  essential  in  business  as  is  the  ability  to  turn 
out  good  products. 

The  Weakness  of  Socialism.  —  (i)  Strong  as  may  be  the  fore- 
going indictment  of  the  existing  industrial  system,  it  is  not  sufficient 
to  indicate  that  socialism  is  to  be  the  necessary  or  the  desirable 
outcome.  The  modern  machine  age  is  little  more  than  a  century 
old,  and  some  of  its  most  important  phases  are  very  recent.  The 
dire  predictions  made  by  Karl  Marx  and  his  followers  on  the 
strength  of  some  of  the  earliest  phenomena  of  the  factory  system 
have  not  been  borne  out,  and  similarly  the  evils  of  to-day  may 
possibly  be  very  largely  eliminated  without  departing  from  our 
fundamental  institutions.  In  short,  the  first  weak  point  in  the 
socialist's  position  is  that  he  attempts  to  predict  the  course  of 
economic  evolution  too  far  in  advance.  That  we  shall  have  a 
juster  distribution  of  wealth  in  the  future,  and  that  we  shall  elimi- 


522  OUTLINES   OF   ECONOMICS 

nate  many  of  the  present  wastes  of  production  seems  probable, 
but  whether  this  will  be  accomplished  by  a  socialistic  organization 
or  not,  it  would  be  hazardous  to  predict.  It  is  desirable  to  have 
ideals  to  work  toward,  but  we  should  not  pin  our  faith  now  to  a 
future  method  for  attaining  them,  for  no  one  can  say  that  the 
collective  ownership  of  all  of  the  important  means  of  production 
presents  a  question  that  needs  to  be  decided  now. 

(2)  The  socialist   underestimates  the  efficiency  of  the  present 
system.    To-day  there  is  a  premium  on  energy  and  thrift.    Much 
may  be  wasted,  but  much  is  also  produced.    That  socialism  would 
result  in  a  larger  sum  total  of  goods  for  consumption  has  never 
been  proved.     But  on  the  other  hand,  we  can  say  that  the  present 
regime  is  continually  offering  more  and  more  to  the    mass    of 
the  people.     Their  standard  of  life  is  continually  rising.     Our 
economic  world  is  a  bettering  world. 

(3)  The  socialist  is  also  in  other  respects  too  pessimistic  with 
respect  to  the  present.     He  sees  all  of  the  starvation,  misery, 
luxury,  and  extravagance,  but  he  passes  by  the  millions  of  happy 
homes  scattered  throughout  the  land.     He  does  not  see  that  the 
world  is  full  of  opportunity  for  the  rising  generation,  that  even  if 
the  chance  for  the  ownership  of  an  independent  business  for  the 
ordinary  man  is  smaller,  the  things  which  he  can  enjoy,  if  he  is  of 
average  intelligence  and  energy,  are  much  greater  than  ever  before 
in  the  world's  history. 

(4)  The  socialist  underestimates  the  importance  of  individual 
responsibility.    To-day  a  man  is  confronted  by  the  stern  necessity 
of  making  his  own  way,  and  this  must  have  some  good  effect  upon 
character.    On  the  whole,  the  lazy  and  incompetent  are  sifted  out. 
Bad  heredity  and  a  lack  of  proper  training  are  the  cause  of  a  good 
deal  of  economic  misfortune.     It  is  well  to  distinguish  the  criticism 
here  made  from  the  common  error  of  supposing  that  socialism 
would  necessarily  crush  individuality,   that  we   must   all  dress 
and  eat  alike,  etc. 

(5)  The  socialist  underestimates  the  importance  of  free  enter- 
prise in  industry.     If  a  man  now  believes  that  he  can  develop  a 
certain  industry  that  will  satisfy  important  wants  of  the  people 
in  the  future,  he  does  not  need  to  secure  the  consent  of  some  gov- 


SOCIALISM  523 

ernment  official  to  make  the  experiment.  The  possibilities  of  a 
free  and  spontaneous  development  should  be  safeguarded  from 
governmental  routine  to  every  possible  extent. 

(6)  Perhaps  the  most  frequently  mentioned  objection  to  social- 
ism is  the  danger  to  liberty.     Under  socialism  there  would  be 
simply  the  public  sphere  of  employment,  and  there  is  reason  to 
fear  that  the  inability  to  escape  from  the  public  sphere  would  com- 
pel the  submission  to  onerous  and  tyrannical  conditions  imposed 
by  the  administrative  heads  of  the  business  in  which  one  might  be 
engaged.    The  socialists,  it  is  true,  have  a  rejoinder  in  the  fact 
that  this  objection  refers  to  liberty  in  the  negative  sense  rather  than 
in  the  positive  sense  of  the  power  to  enjoy  goods,  and  yet  there 
are  many  persons  who  fear  the  tyranny  of  the  majority.    Those 
in  whose  hands  centered  political  and  economic  control  would  have 
tremendous  power,  however  they  might  be  selected  or  appointed. 
As  in  the  religious  sphere  in  the  past,  so  in  the  economic  sphere 
in  the  future,  we  may  find  that  compulsory  cooperation  is  incom- 
patible with  human  nature. 

(7)  The  Marxian  socialists  may  be  criticised  for  the  importance 
which  they  attach  to  the  economic  interpretation  of  history,  for 
the  validity  of  that  proposition  does  not  establish  the  validity  of 
the  socialist  contention.     If  it  be  true  that  our  social  life  is  a  reflex 
of  our  economic  activity,  it  still  does  not  necessarily  follow  that 
our  economic  development  is  going  to  be  such  as  will  land  us  in 
socialism.    Their  doctrine  of  the  class  struggle  also  does  not  give 
an  accurate  account  of  existing  conditions.     We  have  a  laboring 
class  and  a  capitalist  class,  it  is  true,  but  there  is  also  a  considerable 
class,  perhaps  large  enough  to  hold  the  balance  of  power  between 
the  other  two,  which  does  not  sympathize  exclusively  with  either 
labor  or  capital. 

Social  Reform.  — There  are  those  who  recognize  the  strength  of 
the  socialist's  criticism  of  the  existing  economic  and  social  order, 
but  who  believe  it  wise  to  attack  the  various  problems  confronting 
us  one  at  a  time.  Social  reform  seems  likely  to  accomplish  more 
valuable  results  than  socialism.  We  have  a  monopoly  problem 
before  us  now.  Its  solution  may  involve  a  considerable  extension 
of  government  enterprise.  Why  not  concentrate  our  efforts  upon 


524 


OUTLINES    OF   ECONOMICS 


that  problem  instead  of  making  up  our  minds  now  whether  some 
day  the  greater  proportion  of  the  industrial  field  must  be  collect- 
ively owned  and  managed  ? 

The  Socialist  Movement.  —  In  every  country  of  importance  at 
the  present  time  there  is  an  organized  socialist  movement,  and 
while  it  may  never  attain  its  ideals,  it  is  exercising  an  important 
influence  on  present-day  affairs.  This  is  most  marked  in  the  case 
of  Germany.  Its  voting  strength  has  been  steadily  increasing, 
although  in  the  last  election  its  representation  in  the  Reichstag 
was  considerably  reduced,  as  shown  in  the  following  table:  — 


VOTES 

REPRESENTATIVES 

1878 

437.  I0° 

9 

1881 

312,000 

12 

1884 

550,000 

24 

1887 

763,100 

II 

1890 

1,427,300 

35 

i893 

1,786,700 

44 

1898 

2,107,100 

56 

J9°3 

3,010,800 

77  l 

1907 

3,251,000 

43 

1  The  membership  later  rose  to  81.    The  total  number  of  seats  in  the  Reichstag  is  397. 

Although  the  official  platform  of  the  party  adheres  strictly  to 
the  orthodox  Marxian  faith,  the  party  itself  has  worked  for  many 
reforms  tending  to  favor  the  lower  classes,  and  a  large  element  of 
the  party  (the  "  revisionist  "  wing)  is  in  favor  of  putting  the  doc- 
trine of  the  class  struggle  and  complete  collectivism  in  the  back- 
ground, and  laying  main  emphasis  for  the  present  upon  social 
reform.  In  France  there  are  a  number  of  socialist  factions,  or 
various  degrees  of  radicalism,  nominally  united  in  one  party,  the 
factional  strife  being  one  of  the  prominent  characteristics  of  the 
movement  in  that  country.  Their  combined  representation  in  the 
chamber  of  deputies  is  about  one  seventh  of  the  total  membership. 
A  member  of  the  moderate  group,  Millerand,  was  made  Minister  of 
Commerce  (1899)  in  the  Waldeck -Rousseau  cabinet.  In  a  num- 
ber of  French  municipalities  the  government  is  almost  completely 


SOCIALISM  525 

socialistic  in  personnel.  The  result  in  these  cases  has  been  an 
increased  public  activity  in  behalf  of  workingmen,  the  poor,  and 
the  unfortunate. 

In  Belgium  the  success  of  the  socialist  party  in  promoting  the 
cooperative  movement  has  been  striking.  In  England  the  or- 
ganized socialistic  party  had  small  influence  in  political  affairs 
until  recently,  when  a  "  labor  group  "  was  organized  in  Parlia- 
ment. The  Collectivist  activity  of  the  London  County  Council 
may  also  be  mentioned  in  this  connection.  In  the  United  States 
there  afe  two  rival  parties,  the  Socialist  party  of  America  and 
the  Socialist  Labor  party  (of  declining  importance)  both  having 
platforms  based  upon  the  Marxian  philosophy.  A  number  of 
mayors  and  state  legislators  have  been  elected,  but  there  are  no 
socialist  representatives  in  Congress.  In  1904  the  Presidential 
Socialist  vote  was  about  3  per  cent  of  the  total  votes  cast. 

Socialists  have  rendered  good  service  by  calling  attention  to 
social  problems,  by  forcing  us  to  reflect  on  the  condition  of  the  less 
fortunate  classes,  by  quickening  our  consciences;  also  by  helping 
us  to  form  the  habit,  acquired  by  few  as  yet,  of  looking  at  all  ques- 
tions from  the  standpoint  of  the  public  welfare  and  not  merely 
of  individual  gain;  finally,  by  calling  our  attention  to  the  nature 
of  the  industrial  functions  of  government  and  helping  us  to  sepa- 
rate rationally  the  private  industrial  sphere  from  the  public  indus- 
trial sphere.  A  number  of  questions  having  no  connection  with 
socialism  have  been,  even  by  socialists,  not  infrequently  associated 
with  it.  Atheism  and  free  love  may  be  mentioned.  Socialists 
generally,  however,  regard  religion  and  marriage  as  changing 
institutions. 

Anarchism.  —  In  contrast  with  the  socialist,  the  anarchist  holds 
that  the  ideal  social  arrangement  is  that  men  should  freely  and 
spontaneously  form  cooperative  groups.  The  anarchists  attack 
government  and  deny  the  right  of  one  man  to  exercise  authority 
over  another.  Freedom,  independence,  self-reliance,  non-com- 
pulsion is  what  appeals  to  them.  Such  an  ideal  contains  nothing 
reprehensible,  but  its  complete  attainment  is  impossible.  Some 
governmental  compulsion  seems  necessary  with  human  nature 
as  it  is  or  is  ever  likely  to  be.  The  anarchist  is  not  opposed  to 


526  OUTLINES   OF  ECONOMICS 

the  principle  of  association;  he  simply  asks  that  the  association 
be  voluntary.  The  anarchist  ideal  is  thus  portrayed  by  Kropot- 
kin:  — 

"This  society  will  be  composed  of  a  multitude  of  associations  federated 
for  all  the  purposes  which  require  federation;  trade  federations  for  produc- 
tions of  all  sorts,  —  agricultural,  industrial,  intellectual,  artistic;  communes 
for  consumption,  making  provision  for  dwellings,  gas-works,  supplies  of  food, 
sanitary  arrangements,  etc.;  federations  of  communes,  among  themselves, 
and  federations  of  communes  with  trade  organizations;  and  finally,  wider 
groups  covering  all  the  country,  or  several  countries,  composed  of  men  who 
collaborate  for  the  satisfaction  of  such  economic,  intellectual,  artistic,  and 
moral  needs  as  are  not  limited  to  a  given  territory.  All  these  will  combine 
directly  by  means  of  free  agreements  between  them,  just  as  the  railway 
companies  or  the  postal  departments  of  different  countries  cooperate  now, 
without  having  a  central  railway  or  postal  government,  —  even  though  the 
former  are  actuated  by  merely  egotistic  aims,  and  the  latter  belong  to  different 
and  often  hostile  states;  or  as  meteorologists,  the  Alpine  clubs,  the  lifeboat 
stations  in  Great  Britain,  the  cyclists,  the  teachers,  and  so  on,  combine  for 
all  sorts  of  work  in  common,  for  intellectual  pursuits  or  simply  for  pleasure."1 

Many  persons  class  anarchists  and  socialists  together  as  simply 
dangerous  persons.  One  thing  they  do  have  in  common,  and  that 
is,  discontent  with  existing  conditions.  Othenvise  their  views 
are  radically  divergent. 

Anarchists  differ  among  themselves.  The  leading  "  Commun- 
ist-Anarchist "  is  Kropotkin,  who  advocates  revolutionary  tactics. 
Bakunine  and  Stirner  have  also  stood  for  violence.  The  "  in- 
dividualistic anarchists,"  such  as  Tolstoi  and  Tucker,  pursue  a 
peaceful  policy  of  non-resistance.  Godwin  and  Proudhon  may 
be  called  anarchistic  reformers. 

QUESTIONS  AND  EXERCISES 

1.  Is  the  public  purchase  of  a  street-railway  system  socialistic  ? 

2.  Does  William  Morris,  in  his  News  from  Nowhere,  picture  socialism  or 
anarchism  ? 

3.  Compare  the  Amana  Society  with  the  New  Harmony  Community. 

4.  What  is  meant  by  the  economic  interpretation  of  history?     Is  it  ac- 
cepted by  thinkers  who  are  not  socialists  ? 

5.  What  thoughts  are  common  to  the  various  platforms  given  in  the  ap- 
pendices to  Ely's  Socialism  and  Social  Reform  ? 

6.  Write  a  sketch  of  the  life  of  Josiah  Warren. 

1  Memoirs  of  a  Revolutionist,  pp-  398~399- 


SOCIALISM  527 

REFERENCES 

BAX,  E.  B.     Essays  in  Socialism,  New  and  Old.    (From  a  socialist  point  of 

view.) 
BROOKS,  J.   G.     The  Social  Unrest,  Chaps.  VII-X.     (Sympathetic  critic 

of  socialism.) 
COMMONS,  J.  R.     "The  Class  Conflict,"  American  Journal  of  Archaeology, 

May,  1906. 

ELY,  R.  T.     Socialism  and  Social  Reform,  and  French  and  German  Social- 
ism, and  the  articles  on  Socialism  and  Socialist  Parties  in  the  new 

International  Encyclopaedia. 

ELTZBACHER,  PAUL.     Anarchism.     (Trans,  by  S.  T.  Byington.) 
ENSOR,  R.  C.  K.  (Editor).    Modern  Socialism,  ad  ed.    (A  collection  of  essays 

by  leading  socialists.) 
HILLQUTT,  MORRIS.     History  of  Socialism  in  the    United  States.      (By  a 

socialist.) 

HINDS,  W.  A.     American  Communities.     (Descriptive.) 
JAURES,  JEAN.     Studies  in  Socialism.     (Trans,  by  M.  Minturn.)     (By  a 

conservative  French  socialist.) 
KlRKUP,  T.     History  of  Socialism. 

LE  ROSSIGNOL.  Orthodox  Socialism.  (Criticism  of  leading  doctrines.) 
MALLOCK,  W.  H.  Aristocracy  and  Evolution.  (Opposed  to  socialism.) 
MORRIS,  WILLIAM.  News  from  Nowhere. 

RAE,  J.     Contemporary  Socialism,  ad  ed.     (Opposed  to  socialism.) 
SPENCER,  HERBERT.     Man  versus  the  State.     (Opposed  to  socialism.) 
SELIGMAN,  E.  R.  A.     The  Economic  Interpretation  of  History. 
TUCKER,  BENJAMIN.     Instead  of  a  Book,  ad  ed.     (By  a  leading  anarchist.) 
VEBLEN,  T.  B.     The  Theory  of  Business  Enterprise,  Chap.  IX.  (Severely 

critical  of  existing  conditions,  but  not  accepting  socialism.) 
WELLS,  H.  G.     A  Modern  Utopia. 
ZENKER,  E.  V.     Anarchism.     (Attempts  to  give  an  exposition  of  anarchism 

without  taking  sides.) 


CHAPTER    XXXI 
AGRICULTURAL   PROBLEMS 

THE  socialistic  ideal  of  a  highly  centralized  and  delicately  co- 
ordinated industrial  system,  discussed  in  the  preceding  chapter, 
is  confronted  with  a  sharp  contrast  in  the  agricultural  industry 
as  it  exists  to-day.  Even  in  the  most  advanced  countries,  agri- 
culture is  still  strikingly  decentralized,  and  furnishes  at  once  the 
best  illustration  and  the  most  fertile  source  of  economic  individu- 
alism. 

Size  of  Farms.  —  Agriculture  has  never  been,  and  shows  no 
disposition  to  become,  a  large-scale  industry  in  the  United  States. 
The  statistical  evidence  upon  which  this  assertion  rests  is  pre- 
sented in  compressed  form  in  Table  I  upon  the  following  page. 
A  comparison  of  columns  2  and  3  brings  out  the  interesting  fact 
that,  in  every  decade  except  one  since  1850,  the  number  of  farms 
has  increased  more  rapidly  than  the  general  population.  In  1850 
there  was  one  farm  for  every  16  persons;  but  one  for  every  13.3 
persons  in  1900; 1  one  farm  for  every  14  rural  residents  (persons 
outside  of  cities  containing  8000  inhabitants  or  more)  in  1850,  but 
one  for  every  9  rural  residents  in  1900.  Moreover,  there  was 
in  1900  one  farm  of  50  acres  or  more  for  every  13.4  rural  residents, 
thus  indicating  that  the  proportionate  increase  in  the  number  of 
farms  is  due  "  not  to  the  addition  of  mere  potato  patches  or  small 
tracts  of  land  used  incidentally  for  agricultural  purposes,  but  to  a 
marked  increase  in  the  number  of  real  farms.  This  growth  marks 
an  increase  among  tne  rural  population  in  the  number  of  farmers 
whose  head  members  are  their  own  masters,  and  is  a  movement 
toward  economic  individualism  as  distinct  as  the  opposite  tend- 

1  The  increasing  proportion  of  adult  males  in  the  general  population  somewhat 
reduces  the  significance  of  this  statement. 

528 


AGRICULTURAL  PROBLEMS 


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530  OUTLINES   OF   ECONOMICS 

ency  in  cities  toward  wage  service  and  dependence  upon  em- 
ployers." 1 

Coming  back  to  Table  I,  we  find  additional  evidence  in  support 
of  the  generalization  just  quoted.  Columns  4  and  5  make  it  plain 
that  the  bonanza  farm  which  once  occupied  such  a  prominent 
place  in  foreign  and  socialistic  discussions  of  American  agriculture, 
is  an  exception  which  promises  to  become  rarer  and  not  more 
frequent  with  the  passage  of  time.  Columns  6,  7,  and  8  show 
that  the  increase  in  the  value  of  the  average  farm  is  trivial  —  far 
less  than  the  increase  in  the  wealth  of  the  average  member  of 
the  agricultural  class.  Columns  q,  10,  and  n  furnish  surprising 
evidence  to  the  effect  that  the  land  itself  is  not  absorbing  a  larger 
and  larger  share  of  the  farmer's  capital  as  time  passes.  Prac- 
tically the  only  noticeable  change  is  the  increasing  importance  of 
live  stock  on  the  farm  —  a  change  which  is  regarded  by  practically 
every  authority  as  wholesome  and  encouraging.  Finally,  columns 
12,  13,  and  14  reflect  in  statistical  form  the  growing  scarcity  of 
farm  labor  and  the  increasing  use  of  farm  machinery  in  the  culti- 
vation of  the  staple  crops. 

The  foregoing  statistics  are  only  approximately  correct,  and 
conceal  a  great  variety  of  conflicting  movements  in  different  parts 
of  the  country.  But  they  represent  the  true  average  condition, 
the  real  resultant  movement;  and  study  of  the  details  furnishes 
no  reason  to  question  the  general  accuracy  of  their  showing. 
American  agriculture  shows  no  tendency  to  become  either  a  large 
scale  or  a  highly  capitalized  form  of  industry. 

Even  Mr.  Prothero,  as  the  following  quotation  shows,  has  been  led  into 
error  on  this  point.  "Statistics  show  that,  in  a  country  [the  United  States] 
where  estates  in  fee  tail  are  obsolete  or  abolished  by  law,  where  there  is  no 
feudal  tenure,  no  primogeniture,  no  privileged  class,  —  in  a  country,  finally, 
where  the  transfer  of  land  is  simple,  easy,  and  cheap,  —  large  estates  and  large 
farms  have  become  the  rule.  The  United  States  contain  more  tenant  farmers 
than  any  other  country  in  the  world,  and,  where  this  class  exists,  those  who 
do  the  drudgery  do  not  own  the  land.  Land  monopoly  is  becoming  the 
system  of  America."  * 

1  Twelfth  Census,  "  Agriculture,"  Part  I,  p.  xxxiv. 

'Prothero,  R.  E.  The  Pioneers  and  Progress  of  English  Farming  (1888), 
p.  146. 


AGRICULTURAL   PROBLEMS  531 

So  much  for  the  size  of  the  farm  as  it  is;  the  next  question  con- 
cerns the  size  of  the  farm  as  it  should  be.  Would  the  prosperity 
of  the  agricultural  classes  and  the  general  welfare  be  increased 
by  expanding  or  reducing  the  farm  unit,  by  more  or  less  intensive 
farming? 

Obviously  no  simple  answer  can  be  given  to  this  question. 
The  value  of  the  land  or  the  rent  it  will  bring  is  perhaps  the  most 
important  factor:  high  rental  value  indicates  that  the  margin  of 
cultivation  has  been  forced  to  a  comparatively  low  point,  and  makes 
it  both  necessary  and  profitable  to  work  the  land  intensively,  for 
the  same  reason  that  the  owner  of  a  very  valuable  manufacturing 
plant  is  inclined  to  run  it  night  and  day,  if  possible,  in  order  to 
reduce  that  part  of  the  cost  of  production  which  represents  fixed 
charges  or  interest  on  the  capital  that  is  sunk  in  the  enterprise. 
In  addition  to  the  factor  of  rent,  the  amount  of  capital  that  he  can 
command,  the  kind  of  farming  in  which  he  is  most  skilled,  the 
character  of  the  labor  he  can  secure,  the  proximity  of  markets,  and 
the  adequacy  of  transportation  facilities,  all  must  be  taken  into 
account  by  the  individual  farmer  in  determining  how  large  a  farm 
he  will  attempt  to  manage  and  how  intensively  he  will  farm  it. 

Speaking  generally,  however,  two  powerful  but  counteracting 
forces  can  be  detected  in  the  agricultural  industry,  which  prevent 
the  industry  from  becoming  either  predominantly  intensive  or 
predominantly  extensive.  On  the  one  hand,  machinery  can  be 
employed  most  advantageously  on  a  comparatively  large  farm, 
and,  other  things  being  equal,  the  use  of  labor-saving  machinery  is 
desirable.  On  the  other  hand,  the  importance  of  labor  is  greater, 
and  the  importance  of  the  manager  or  entrepreneur  is  less,  in  agri- 
culture than  in  manufactures;  and  on  this  account  the  stimulus 
given  to  the  individual  laborer  by  the  sense  of  proprietorship  is 
a  far  more  potent  factor  in  agriculture  than  in  other  industries. 
Large  factories  controlled  by  one  entrepreneur  employing  hundreds 
of  dependent  workmen  have  proved  economically  superior  in  the 
manufacturing  industry,  because  of  the  possibility  of  supervising 
the  labor,  checking  and  measuring  its  efficiency  automatically. 
In  agriculture,  however,  technical  skill  remains  far  more  important 
relatively  to  those  commercial  or  financial  talents  which  distin- 


532  OUTLINES   OF   ECONOMICS 

guish  the  successful  employer  than  in  any  other  great  division 
of  production. 

This  question  is  primarily  one  of  private  profit,  which  the  indi- 
vidual must  decide  for  himself,  but  the  legislator  and  the  scientific 
student  can  be  of  some  assistance  in  helping  to  develop  that  most 
difficult  branch  of  commercial  science  —  farm  accounting  —  and 
in  keeping  the  farmer  alive  to  those  changes  in  prices,  wages,  and 
transportation  charges  to  which  the  farm  organization  must  adjust 
itself.  On  the  whole,  however,  the  emphasis  is  wisely  placed  by 
the  average  educator,  at  the  present  time,  upon  the  possibilities 
and  opportunities  of  more  intensive  farming.  In  the  past,  exten- 
sive farming  has  been,  and  justifiably  so,  the  rule  in  this  country, 
and  the  force  of  inertia  is  all  directed  that  way.  But  the  demands 
of  the  future  will  be  in  the  opposite  direction.  As  cities  multiply 
and  the  market  approaches  the  farm,  intensive  farming  will  be 
forced  upon  the  people,  and  the  readier  we  are  to  adapt  ourselves 
to  this  change,  the  less  will  be  the  friction  and  loss.  Moreover, 
the  ability  to  earn  a  living  by  intensive  farming  makes  it  easier 
to  acquire  a  farm;  and  we  are  strongly  of  the  opinion,  as  will  ap- 
pear hereafter,  that  widely  diffused  ownership  is  better  than  a 
general  system  of  tenancy,  even  where  land  values  are  high. 

Finally,  it  may  be  noted  that  practically  every  European  country 
attempts  by  legislation  to  increase  the  number  of  small  holdings; 
and  in  a  mixed  problem  of  this  kind,  which  is  as  much  psycholog- 
ical and  social  as  strictly  economic,  the  instincts  of  the  majority 
are  likely  to  have  a  sound  social  basis.  Even  in  England,  where 
comparatively  large  farming  has  had  the  greatest  opportunity 
and  the  most  favorable  environment,  the  consensus  of  opinion 
seems  to  favor  the  encouragement  of  small  holdings.  English 
authorities  maintain,  as  a  rule,  that  a  mixed  system  of  large  and 
small  farms  is  the  ideal  condition,  but  that  at  present  the  emphasis 
should  be  placed  on  intensive  farming.  In  1889  a  Select  (British) 
Committee  on  the  subject  recommended  unanimously  that  "  the 
extension  of  a  system  of  small  holdings  is  a  matter  of  national 
importance;"  and  in  1892  Parliament  passed  the  Small  Holdings 
Act  which  empowers  county  councils  to  purchase  land  and  sell 
or  lease  it  in  small  holdings.  Purchasers  were  required  to  pay 


AGRICULTURAL  PROBLEMS  533 

one  fifth  of  the  price  on  taking  possession,  and  the  remainder  in 
fifty  years.  In  the  beginning  the  Act  does  not  appear  to  have  been 
a  glowing  success,  and  by  1903  only  62  small  holdings,  covering 
248  acres,  had  been  sold,  and  166  holdings,  covering  373  acres, 
let.  Recent  amendments  of  the  Act,  however,  appear  to  have 
aroused  more  interest,  and  it  is  now  asserted  that,  "  since  the  pass- 
ing of  the  Small  Holdings  Act,  upwards  of  47,000  small  holdings 
have  been  applied  for  in  various  parts  of  the  country."  * 

We  would  not  be  misunderstood.  A  universal  system  of  small 
holdings  would  be  good  for  no  country,  as  a  certain  number  of 
large  farms,  assisted  by  abundant  capital,  are  needed  to  set  the 
pace  in  the  improvement  of  agricultural  methods.  And  in  the 
United  States,  it  is  hoped,  small  holdings  on  the  British  scale  will 
not  have  to  be  considered  for  many  generations,  while  we  never 
want  the  peasant  farmer.  But  we  do  want  the  cultivation  of  that 
spirit  which  has  made  Danish  agriculture,  in  spite  of  great  obstacles, 
such  a  marvelous  success;  and  it  is  imperative  to  avoid,  if  we  can, 
the  growth  of  those  conditions  which  have  drawn  so  much  of  the 
best  rural  blood  of  England  to  the  cities.  Both  of  these  objects, 
we  believe,  will  be  measurably  advanced  by  the  encouragement 
of  intensive  farming. 

Ownership  and  Tenancy.  — The  essential  facts  bearing  upon 
the  subject  of  farm  ownership  and  tenure  are  summarized  in 
Table  II,  which  is  presented  on  the  following  page. 

Section  A  of  the  table  shows  that  cash  and  share  tenancy  are 
increasing  in  the  United  States,  and  that  the  proportion  of  farms 
operated  by  their  owners  was  smaller  in  1900  than  in  either  1890 
or  1880.  Two  interpretations  of  this  phenomenon  have  been 
advanced.  According  to  the  first,  which  is  based  partially  upon 
the  statistics  cited  in  Section  B  of  the  table,  the  growth  of  tenancy 
is  due  primarily  to  the  increasingly  rapid  rise  of  farm  laborers  from 
the  position  of  wage  earner  to  that  of  tenant.  In  this  view,  accord- 
ingly, the  increase  of  tenancy  is  encouraging.  According  to  the 
second  interpretation,  based  partially  upon  the  facts  presented  in 
Sections  C  and  E,  the  growth  of  tenancy  is  not  an  encouraging 

1  The  Westminster  Review,  May,  1908,  p.  516.  For  the  history  of  the  legisla- 
tion, see  L.  Jebb,  The  Small  Holdings  of  England,  Chap.  IX. 


534 


OUTLINES   OF  ECONOMICS 


TABLE   II 

STATISTICS  OF  FARM  OWNERSHIP  AND  FARM  TENURE  IN  THE  UNITED 
STATES  :  1880-1900 


1900 

1890 

1880 

(Per  cent  of  farms  operated  by  owners  

64  7 

71.6 

74.  e 

A 

Per  cent  of  farms  operated  by  cash  tenants  .  .  . 
Per  cent  of  farms  operated  by  share  tenants  .  . 

I3-I 

22.2 

IO.O 

18.4 

8.0 

17-5 

[Per  cent  of  males  employed  in  agriculture  : 
Who  are  owners  

42.3 

42.0 

42.2 

Who  are  tenants  

23  I 

16.6 

14.  C 

Who  are  laborers  and  others  

34  6 

4.1.4. 

43  3. 

Per  cent  of  persons  owning  farm  homes: 
All  ages    .    .        

64  4 

6s  o 

Under  25  vears  

27.8 

32.6 

C  H 

25  to  34  years  

4<?.3 

40.8 

3<J  to  44  vears  .  . 

64  4 

64  o 

4?  to  ?4  vears 

7O  7 

72  3 

55  years  and  over  

8l.4 

82.2 

Per  cent  of  owners  of  rented  farms  who  own  : 
i  farm  

800 

2  farms  4  

114 

p  < 

3  and  under  5  farms  

e.A. 

5  and  under  10  farms  

2.3 

10  and  under  20  farms  

O  7 

20  farms  and  over  

O  2 

Per  cent  of  farm  homes  owned  : 
Free  

689 

71.8 

Encumbered  

31   I 

28  2 

Encumbered,  all  ages  

31    I 

28.2 

Encumbered,  under  25  years  

20  3 

21.0 

E 

Encumbered,  25  to  34  years  

•JC    C 

31  0 

Encumbered,  35  to  44  years  

366 

3.1  8 

Encumbered,  45  to  54  years  

3i.8 

3O.2 

Encumbered,  55  years  and  over  

24.6 

22.6 

A,  B,  and  D  from  Twelfth  Census,  Agriculture,  Part  I,  pp.  Ixxvii,  Ixxxviii  ;  C  and  E  from 
Twelfth  Census,  Population,  Part  II,  p.  ccxi.  The  statistics  under  B  are  in  the  nature  of 
estimates,  a  small  number  of  female  owners  and  tenants  being  included  under  "  laborers  and 
others."  The  aggregate  percentages  under  A  differ  from  those  under  C,  owing  to  the  fact 
that  they  were  collected  by  different  departments  of  the  census,  and  apply  to  slightly  differ- 
ent areas. 


AGRICULTURAL  PROBLEMS  535 

sign,  and  indicates  that  it  is  becoming  more  and  more  difficult 
to  acquire  ownership  of  land  in  this  country.  The  statistics  of 
ownership  under  C  prove  that  there  is  a  steady  movement  from 
tenancy  to  ownership  as  farmers  grow  older.  More  than  70  per 
cent  of  the  farmers  between  45  and  54  years  of  age,  but  only  45.3 
per  cent  of  those  between  25  and  34  years  of  age,  owned  the  farms 
which  they  operated  in  1900.  This  steady  advance  is  encouraging; 
but  the  comparison  of  the  figures  for  1900  and  1890  indicates  that 
the  rate  of  advance  is  declining.  Moreover,  the  statistics  presented 
in  Section  E  show  that  the  proportion  of  owned  farms  which  were 
burdened  with  indebtedness  was,  for  every  age  group,  larger  in 
1900  than  in  1890. 

The  statistics  presented  in  Table  II  and  the  two  interpretations 
of  their  meaning  are  not,  in  reality,  inconsistent.  Tenancy  is 
more  frequent  in  the  South  Central  and  South  Atlantic  states  than 
in  other  sections  of  the  country,  and  more  prevalent  among  negroes 
than  any  other  class  of  farmers.  Here,  evidently,  tenancy  does 
represent  an  advance.  The  negroes  who  are  tenants  to-day  were 
farm  laborers  a  few  years  ago  and  slaves  a  half  century  back.  On 
the  other  hand,  tenancy  is  also  prevalent  and  growing  in  the  richest 
farming  district  of  the  country,  a  district  in  which  farm  values 
are  high  and  advancing  very  rapidly;  and  in  this  district  —  the 
North  Central  states  —  there  is  evidence  of  a  close  though  not 
perfect  correlation  between  farm  values  and  tenancy.1 

There  is  no  cause  for  grave  alarm  concerning  farm  tenancy  in 
this  country.  Although  the  census  of  1900  revealed  one  landlord 
who  owned  704  farms  worth  $4,545,230,  Section  D  of  Table  II 
shows  that  80  per  cent  of  the  landlords  owned  only  i  rented  farm, 
and  96.8  per  cent  less  than  5  rented  farms;  while  the  additional 
fact  that  78.8  per  cent  of  the  landlords  lived  in  the  same  county 
in  which  their  farms  were  located  proves  that  absentee  landlordism 
has  not  developed  to  any  extent  in  this  country.  But  we  cannot 
regard  present  tendencies  with  all  the  complacency  exhibited  by 
some  writers.2  For  not  only  has  it  been  shown  that  the  increase 

1  See  H.  C.  Taylor,  Agricultural  Economics,  pp.  224-250. 

2  See  Twelfth  Census,  "Agriculture,"    Part  I,   pp.  Ixxvii-lxxxi ;   and   E.  L. 
Bogart  in  the  Journal  of  Political  Economy  for  April,  1908. 


536  OUTLINES   OF  ECONOMICS 

of  tenancy  in  the  North  Central  states  is  probably  due  to  the  in- 
creasing difficulty  of  acquiring  land  consequent  upon  advancing 
land  values;  but  tenancy  is  bound  to  increase  as  land  values  ad- 
vance, unless  the  American  farmer  learns  how  to  get  a  living  from 
smaller  holdings.  When  land  goes  to  $200  an  acre,  the  average 
young  farmer  can  neither  save  enough  nor  command  enough 
credit  to  buy  a  farm  of  160  acres  and  equip  it  properly.  We  shall 
have  either  more  tenancy  in  the  older  sections  of  the  country,  as 
time  passes,  or  smaller  farms  and  a  different  type  of  agriculture. 
As  stated  above,  the  latter  change  would  probably  do  more  good 
than  harm  in  the  land.  Our  only  fear  is  that  the  American  farmer 
will  not  adjust  himself  to  it  rapidly  enough. 

And  it  is  doubtful  whether  we  ought  to  derive  comfort  from  an  increase 
in  the  proportion  of  owners  —  as  shown  in  Section  B  of  Table  II  —  when 
this  increase  results  from  an  exodus  of  the  agricultural  population  to  the 
cities,  which  must  itself  be  regarded  with  grave  apprehension.  Census 
officials  explain  away  the  increase  of  tenancy  by  dividing  the  agricultural 
class  into  three  reservoirs,  —  owners,  tenants,  and  others  (presumably 
laborers),  —  and  assure  us  that  the  swelling  volume  of  the  middle  reservoir 
is  due  to  an  increasingly  rapid  flow  from  the  labor  reservoir  to  the  tenant 
reservoir,  rather  than  a  decreasingly  rapid  flow  from  the  tenant  reservoir  to 
the  reservoir  of  owners.  But  what  about  the  flow  from  the  labor  reservoir  to 
non-agricultural  occupations  ?  And  how  much  of  the  diminution  of  owner- 
ship in  trade  and  manufactures  should  be  charged  against  the  increase  of 
ownership  in  agriculture?  It  is  a  condition,  not  a  theory,  confronting  us, 
and  when  we  start  to  explain  this  condition,  it  is  not  permissible  to  halt 
midway  in  the  explanation.1 

Farm  Labor.  —  Although  the  agricultural  account,  to  use  a 
bookkeeper's  metaphor,  must  be  debited  with  any  evil  resulting 
from  the  rural  exodus,  before  we  can  strike  a  proper  balance  of 
social  profit  and  loss,  the  condition  of  those  laborers  who  have 
remained  upon  the  farms  has  unquestionably  been  improved  by 

1  Two  other  agricultural  problems  of  great  importance  might  logically  be  in- 
troduced here  —  share  versus  cash  tenancy  and  a  consideration  of  the  conditions 
under  which  it  is  better  for  a  young  farmer  to  hire  than  attempt  to  buy  a  farm. 
The  latter  problem  is  considered  in  connection  with  other  relevant  questions  on 
page  540  of  this  chapter.  The  former  question  involves  a  discussion  of  the  de- 
tails of  farm  leases,  and  must  be  left  to  the  larger  treatises,  although  we  may 
venture  the  suggestion  that  more  depends  upon  the  customs  and  conditions  of 
peculiar  localities  than  upon  any  inherent  superiority  of  the  cash  rental. 


AGRICULTURAL   PROBLEMS 


537 


this  exodus.  The  movement  of  the  wages  of  farm  labor  since 
the  Civil  War  is  described  statistically  in  Table  III,  following. 
From  this  it  appears  that  farm  wages  were  higher  in  the  last 

TABLE  III 

WAGES  OF  FARM  LABOR  IN  THE  UNITED  STATES  FOR  SPECIFIED  YEARS: 

1866-1902 

(Wages  expressed  in  currency  for  the  years  1866,  1869,  1875) 


PER  MONTH 
FOR  YEAR  OR 

PER  DAY 
IN  HARVEST 

ORDINARY 
FARM  LABOR 

RELATIVE  WAGES 
PER  MONTH  WITH 
BOARD  ON  THE 

SEASON 

PER  DAY 

YEAR 

BASIS  OF  1800 

Without 

With 

Without 

With 

Without 

With 

Money 

Real 

board 

board 

board 

board 

board 

board 

wages 

wages 

1902 

$22.14 

$16.40 

*i-53 

$1.34 

$1.13 

$.89 

I3I-7 

121.  6 

1899 

20.23 

14.07 

J-37 

1.  12 

I.OI 

•77 

113.0 

116.3 

1898 

19.38 

*3-43 

1.30 

1.05 

.96 

.72 

107.9 

111.9 

1895 

17.69 

I2.O2 

1.14 

.92 

.81 

.62 

96-5 

IOI.O 

1894 

J7-74 

12.  l6 

1-13 

•93 

.81 

•63 

97-7 

100.3 

1893 

19.10 

13.29 

1.24 

1.03 

.89 

.69 

106.7 

104.7 

1892 

18.60 

12-54 

1.30 

1.02 

.92 

.67 

100.7 

IOI.2 

1890 

i8-33 

12.45 

1.30 

I.O2 

.92 

.68 

IOO.O 

IOO.O 

1888 

18.24 

12.36 

i-3i 

I.  O2 

.92 

.67 

99-3 

96.7 

1885 

17.97 

12.34 

1.40 

I.IO 

.91 

.67 

99.1 

99-5 

1882 

18.94 

12.41 

1.48 

"5" 

•93 

.67 

99-7 

85-7 

1879 

16.42 

10.43 

1.30 

1.  00 

.81 

•59 

83.8 

82.6 

1875 

19.87 

12.72 

1.70 

i-35 

i.  08 

•78 

IO2.2 

74-3 

1869 

25.92 

16.55 

2.  2O 

1.74 

1.41 

1.02 

132.9 

81.8 

1866 

26.87 

17-45 

2.  2O 

1.74 

1.49 

1.  08 

I4O.2 

70.0 

NOTE.  —  Broad  averages  are  particularly  unsatisfactory  in  dealing  with  the  wages  of  farm 
labor,  and  the  reader  should  regard  this  table  not  as  an  exact  exhibit  of  money  wages,  but  as  a 
compendious  method  of  describing  a  social  movement  the  details  of  which  are  beyond  the 
scope  of  this  treatise.  For  a  more  adequate  discussion,  see  Bulletin  No.  26,  Miscellaneous 
Series,  U.  S.  Department  of  Agriculture. 

year  for  which  statistics  are  available  than  ever  before,  if  we 
properly  discount  the  inflated  currency  in  which  wages  were  paid 
in  1866,  1869,  and  1875;  and  the  rough  estimates  of  the  purchasing 
power  of  farm  wages  given  in  the  last  column  of  the  table  indicate 
that  real  wages  have  steadily  risen  since  1866.  Moreover,  the  testi- 


538  OUTLINES   OF  ECONOMICS 

mony  is  practically  unanimous  to  the  effect  that  the  increased  use 
of  farm  machinery  has  not  only  reduced  the  hours  of  labor,  but 
has  diversified  and  lightened  the  toil  of  the  farm  hand.  Added 
to  these  evidences  of  increasing  material  comfort  is  the  reassuring 
fact  that  the  farm  hand  retains,  in  a  large  degree,  his  superior 
social  position.  The  native  white  farm  laborer  usually  eats  at 
the,  same  table  with  his  employer,  shares  his  social  diversions,  and 
in  general  mixes  in  the  same  social  class  on  terms  of  approximate 
equality. 

There  is  room,  however,  for  much  improvement.  The  hours  of 
labor  are  still  long  in  the  country,  —  10  in  winter,  12  in  summer, 
13  in  harvest  season  on  the  average,  —  and,  except  on  a  very  small 
number  of  farms,  there  are  two  or  three  months  in  the  year  when 
the  laborer  cannot  secure  full  work.  "  The  able-bodied,  industrious 
man  desirous  of  employing  his  full  vigor  continuously  finds  a  limi- 
tation in  the  average  condition  of  farming.  Seedtime  and  harvest 
make  busy  their  respective  periods,  but  whenever  the  frost  of  winter 
or  the  drought  of  summer  suspend  the  activity  of  vegetation,  there 
will  be  an  interval  in  the  work  of  the  cultivator."1 

Furthermore,  the  best  evidence  obtainable  supports  the  con- 
clusion that  while  "  skilled  labor,  owing  to  its  contact  with  ma- 
chinery and  the  influence  of  education,  has  attained  increased 
efficiency,"  "  unskilled  and  irregular  labor  has  lost  much  of  its  for- 
mer adaptability  and  value  to  the  farm."  2  Worst  of  all,  there  is 
rapidly  developing  a  class  of  migratory  or  casual  agricultural 
laborers  who  drift  from  city  to  country  and  back  again,  who  have 
no  ambition  to  establish  themselves  permanently  upon  the  land, 
and  yet  teach  the  farmer  to  rely  upon  their  assistance,  and  debase 
the  real  standard  of  living  of  the  laborer  who  adopts  farming  as 
a  serious  occupation,  and  looks  forward  to  the  acquisition  some 
day  of  a  farm  of  his  own. 

Farm  Indebtedness  and  Agricultural  Credit.  —  The  favorite 
instrument  by  which  landownership  is  achieved  in  this  country 
is  the  farm  mortgage.  In  1890,  18.60  per  cent  of  all  farm  families 

1  J.  H.  Blodgett,  Wages  of  Farm  Labor  in  the  United  States,  p.  25.   Bulletin  No. 
26,  Miscellaneous  Series,  U.S.  Department  of  Agriculture,  p.  25. 
*  Final  Report  of  the  Industrial  Commission,  p.  92. 


AGRICULTURAL   PROBLEMS 


539 


occupied  encumbered  homes;  35.55  per  cent  of  the  value  of  these 
farms  was  covered  by  indebtedness,  on  which  an  interest  rate  of 
7.07  per  cent  per  annum  was  paid;  64.38  per  cent  of  this  indebted- 
ness was  contracted  for  the  purpose  of  buying  the  farms;  83.51 
per  cent  for  buying,  stocking,  and  equipping  the  farms;  and 
probably  not  more  than  5  or  6  per  cent  (something  between  2.83 
per  cent  and  12.35  Per  cent)  represented  losses  and  household 
expenses  or  "unproductive  consumption."  The  farm  mortgage, 
accordingly,  is  not  necessarily  a  bad  thing.  It  is,  in  census  phrase- 
ology, "  a  mere  business  venture,"  and  in  this  country  has  proved 
a  successful  venture  in  a  surprisingly  large  proportion  of  cases. 
Since  the  financial  depression  of  1893-1897,  particularly,  farm 
mortgages  have  been  paid  off  with  unusual  rapidity. 

In  European  countries,  particularly  on  the  continent,  a  great 
deal  of  legislation  has  been  enacted  for  the  purpose  of  developing 
agricultural  credit;  and  cooperative  credit  associations,  particu- 
larly the  German  Landschaften,  have  played  an  important  part 
in  enabling  farmers  to  obtain  the  capital  necessary  to  purchase  and 
equip  farms.  In  principle  these  associations  are  not  unlike  the 
American  building  and  loan  societies.  They  operate  within 
limited  districts,  lend  their  funds  at  the  lowest  rate  consistent  with 
safety,  compel  borrowers  to  liquidate  the  principal  of  their  loans 
regularly  as  they  make  their  interest  payments,  teach  farmers  how 
to  work  together  for  common  ends,  and  offer  in  their  shares  or 
bonds  a  safe  investment  both  for  the  thrifty  young  farmer  whose 
savings  are  not  large  enough  to  be  lent  in  the  form  of  an  ordinary 
mortgage,  and  for  the  retired  farmer  who  desires  to  be  rid  of  the 
trouble  of  leasing  and  looking  after  his  land. 

At  the  present  time  it  would  be  unwise  to  introduce  into  this 
country  land  banks,  Raiffeisen  credit  banks,  district  credit  associa- 
tions or  any  other  exotic  credit  agency,  merely  for  the  purpose  of 
multiplying  credit  facilities. 

Notwithstanding  this  truth,  however,  it  would  be  a  happy 
augury  for  this  country  if  the  cooperative  credit  association  took 
root  in  our  farming  districts  and  flourished  there;  because  the 
spirit  that  generates  and  sustains  them  is  an  invaluable  social  asset, 
and  once  under  way  such  associations  help  to  strengthen  and  prop- 


540  OUTLINES   OF  ECONOMICS 

agate  that  spirit.  While,  therefore,  it  might  be  unwise  at  this  time 
to  transplant  such  associations  to  this  country  or  assist  them  by 
state  aid,1  it  would  be  the  height  of  wisdom  to  stimulate  the  love 
of  agriculture,  the  atmosphere  of  thrift  and  mutual  aid  in  which 
such  associations  thrive.  For  they  might  possibly  reduce  the 
interest  rate  in  farming  districts  if  they  got  a  foothold  there;  and 
they  would  almost  certainly  provide  farmers  with  a  better  form 
of  investing  their  savings  than  they  now  have,  facilitate  the  sale 
of  land,  and  hence  increase  ownership  as  opposed  to  tenancy, 
compel  borrowers  to  pay  the  principal  of  their  debt  gradually  as 
they  made  the  interest  payments,  and  above  all  train  the  farming 
population  in  habits  of  cooperative  endeavor  and  in  the  wise  use 
of  that  double-edged  sword,  credit.  After  all  our  need  is  not  for 
more  credit  but  for  a  wiser  use  of  credit.  The  good  that  might 
be  accomplished  in  the  South  by  introducing  cooperative  credit 
in  the  place  of  the  crop-lien  system  is  almost  inconceivable.  And 
in  the  first  analysis,  at  least,  such  a  project  does  not  appear  to  be 
hopeless,  for  the  South  is  much  stronger  in  almost  every  way 
to-day  than  was  devastated  Silesia  when  the  first  Landschaft 
began  operations  in  1770. 

Tenancy  versus  Encumbered  Ownership.  —  We  are  now  in 
position  to  discuss  profitably  the  question  when  and  where  —  if 
ever  —  tenancy  is  to  be  preferred  to  land  ownership.  For  though 
it  may  come  as  a  surprise  to  some  American  readers,  many  foreign 
authorities  of  the  highest  rank  strongly  advocate  tenancy  in  pref- 
erence to  ownership  when  land  has  become  very  valuable.  In  the 
expert  evidence  given  before  the  British  committee  of  1906  on 
small  holdings,  for  instance,  the  balance  of  opinion  seems  to  have 
inclined  toward  tenancy  rather  than  ownership. 

Here  again  we  meet  one  of  those  mixed  economic  and  psycho- 
logical questions  to  which  no  simple  answer  can  be  given.  In  a 
frontier  or  newly  settled  community,  there  is,  of  course,  little  reason 
for  tenancy  from  any  standpoint.  But  in  an  old  community, 
where  land  values  are  high  and  are  as  likely  to  fluctuate  down- 

1  However,  the  German  Landschaften  owe  their  origin  to  the  investigations  and 
support  of  Frederick  the  Great,  although  the  details  of  the  system  were  first 
worked  out  by  the  Berlin  merchant,  Biihring.  See  the  Agrarisches  Handbuch 
of  the  Bund  der  Landwirte,  pp.  557-558. 


AGRICULTURAL   PROBLEMS  541 

wards  as  upwards  in  the  next  score  of  years  or  so,  the  economic 
arguments  in  favor  of  tenancy  are  exceedingly  strong  if  not  alto- 
gether convincing,  (a)  Under  such  circumstances  the  farmer 
who  insists  upon  holding  the  title  to  the  land  which  he  tills  must 
either  go  deeply  into  debt,  or  understock  his  farm,  or  both.  To 
underequip  the  farm  means  poor  agriculture;  and  a  heavy  debt 
hangs  like  a  millstone  around  the  neck  of  a  farmer  when  land 
values  are  not  on  the  increase.  The  tenant  farmers  of  England 
have  had  a  far  more  pleasant  time  since  1873  than  the  small  land- 
owning farmers  whose  holdings  were  encumbered  with  debt  at 
that  time,  (b)  The  ownership  of  land  throws  upon  the  farmer 
all  the  speculative  responsibilities  of  the  entrepreneur,  and  other 
things  being  equal  —  if  they  can  ever  be  regarded  as  equal  —  it  is 
desirable  for  the  man  of  small  means  to  avoid  these  responsibilities. 
The  tenant  system  offers  a  means  of  insurance  against  some  of 
these  risks,  (c)  Such  insurance  becomes  all  the  more  advan- 
tageous and  encumbered  ownership  all  the  more  disadvantageous 
because  of  the  well-known  fact  that  land  yields  a  net  return,  year 
by  year,  lower  than  almost  any  other  form  of  property.  Part  of 
this  is  due  to  the  social  prestige  of  landownership  and  part  to  the 
fact  that  over  very  long  periods  the  small  annual  profit  on  land  is 
likely  to  be  compensated  for  by  an  increase  in  the  capital  value  of 
the  land.  Under  such  circumstances  landownership  is  partly  a 
luxury  and  partly  a  method  of  saving,  usually  for  the  descendants 
and  heirs  of  the  saver.  Both  factors  conspire  to  make  land  a 
poor  investment  for  the  man  of  small  means.  He  cannot  afford 
luxuries,  on  the  one  hand,  and  he  must  find  a  method  of  business, 
on  the  other  hand,  that  yields  him  a  quick  return,  (d)  And 
finally,  it  must  be  noted  that  the  question  of  tenancy  is  not  like 
the  labor  problem  which  has  developed  in  the  factory  industries. 
The  tenant  is  not  a  wage-earner.  He  may  be  as  independent  as 
the  manufacturer  who  hires  the  land,  buildings,  and  possibly  the 
machinery  with  which  he  works.  The  problem  of  tenancy,  there- 
fore, has  no  necessary  relationship  to  the  problem  created  by  the 
existence  of  a  class  of  permanent  wage-earners.  The  small  entre- 
preneur still  holds  the  field  in  agriculture,  all  over  the  world.  The 
question  is  simply:  shall  he  hire  his  plant  or  own  it? 


542  OUTLINES   OF  ECONOMICS 

Notwithstanding  the  fact  that  tenant  farming  may  go  hand  in 
hand,  as  it  does  in  England,  with  good  farming,  and  notwithstand- 
ing the  desirability  of  reducing  the  speculative  risks  of  an  industry 
which  is  at  best  much  too  uncertain,  the  problem  can  never  be 
settled  on  economic  grounds  alone ;  and  if  we  add  to  the  economic 
virtues  of  ownership  its  social  and  moral  advantages,  the  final 
verdict  must  be  rendered  against  tenancy.  Ownership  not  only 
spurs  the  zeal  of  the  farmer,  dignifies  his  occupation,  and  inculcates 
a  love  of  the  soil  which  nothing  else  inspires  in  so  great  a  degree, 
but  it  gives  the  farmer  a  stake  in  the  political  game,  steadies  him. 
and  thus  improves  his  citizenship.  It  is  perfectly  plain  that  owner- 
ship cannot  be  enforced  upon  a  people  that  are  not  prepared  for  it : 
certain  restricted  districts  of  the  South  in  which  negro  ownership 
prevailed  a  few  years  ago,  we  understand  on  good  authority,  are 
now  relapsing  into  quasi-barbarism.  And  it  is  equally  obvious 
that  the  virtues  which  go  with  ownership  may  and  often  do  de- 
generate into  vices:  the  peasant  proprietor's  love  of  the  soil  occa- 
sionally becomes  land  worship,  his  thrift  avarice,  his  conservatism 
blind  fear,  and  his  industry  cruel  —  he  drives  himself  and  wife 
and  children  at  a  pace  that  would  put  the  sweater  to  shame. 

But  we  are  not  advocating  the  extension  of  landownership 
through  state  aid  —  we  simply  call  attention  to  the  desirability 
of  fostering  those  qualities  which  lead  to  the  diffusion  of  ownership 
and  are  in  turn  strengthened  by  ownership ;  and  we  maintain  that 
the  American  people  at  present  are  in  no  danger  of  excessive  thrift 
or  of  the  sordid  materialism  of  peasant  proprietorship  at  its  worst. 
The  tendencies  and  the  dangers  are  almost  all  in  the  opposite 
direction.  If,  in  the  next  fifty  years,  the  farmers  of  the  Middle 
West  become  predominantly  tenants,  it  will  not  be  because  tenancy 
is  economically  and  socially  superior  to  ownership,  but  because  the 
farmers  of  that  district  have  not  had  the  thrift  to  save  and  the 
ability  to  adapt  themselves  to  more  intensive  agriculture.  And 
the  step  will  be  backward,  not  forward.  The  popular  instinct 
which  in  this  country  causes  an  increase  of  tenancy  to  be  regarded 
with  distrust  is  a  sound  instinct. 

A  minor  disadvantage  of  tenancy  is  found  in  the  fact  that  tenancy,  when  it 
becomes  predominant,  raises  difficulties  that  can  only  be  met  by  constant 


AGRICULTURAL  PROBLEMS  543 

State  interference.  Short  leases  with  no  indemnification  to  the  tenant  for 
the  improvements  which  he  has  made,  lead  to  rack-renting,  exhaustion  of  the 
soil,  and  class  hatred  between  landlords  and  tenants.  Long  leases,  on  the 
other  hand,  afford  insufficient  protection  to  the  landlord;  because  when 
prices  are  high  the  tenant  thrives  and  pays  his  rent  promptly,  but  when 
prices  fall  rents  go  unpaid  and  the  landlord  has  no  real  redress.  In  England 
the  situation  has  been  met  by  a  system  of  short  time  leases  together  with 
compensation  to  the  tenant  —  a  legal  obligation  which  the  landlord  cannot 
escape  by  "contracting  out"  —  for  any  improvement  made  by  the  tenant 
whose  value  he  has  not  exhausted.  Neither  party  can  abrogate  a  lease 
without  a  year's  notice,  although  by  mutual  consent  this  may  be  reduced  to 
six  months.  This  system  permits  rentals  to  be  adjusted  frequently  as  prices 
change,  rules  out  excessive  competition,  protects  the  landlord,  and  warrants 
the  tenant  in  making  any  improvement  required  by  good  farming,  since  he 
knows  that,  if  the  landlord  orders  him  out,  he  can  collect  on  his  departure 
the  actual  value  of  improvements  made  by  him,  whose  benefits  he  has  not 
had  time  to  reap.  In  practice,  the  incoming  tenant  usually  pays  for  the  un- 
exhausted improvements,  and  disputes  are  settled  by  arbitration.  Under 
this  system,  "the  relation  between  landlord  and  tenant  is  very  satisfactorily 
arranged,  the  farmers  are,  as  a  rule,  contented  with  the  present  system,  and 
the  fields  of  England  prove  that  landownership  on  the  part  of  farmers  is  not 
essential  to  good  agriculture."  l 

Marketing  of  Farm  Products.  —  One  of  our  most  urgent  needs 
at  the  present  time  is  the  greater  diversification  of  industry  in 
general.  The  prices  of  the  great  staple  crops  such  as  wheat  are 
largely  dependent  upon  conditions  of  demand  and  supply  in  for- 
eign markets;  and  the  consequence  is  that  a  poor  crop  may  coin- 
cide with  a  period  of  low  prices,  or  an  abnormally  large  crop  with 
unusually  high  prices.  This  is  almost  impossible  in  the  case  of 
products  whose  value  is  fixed  in  a  local  market.  With  such  prod- 
ucts, the  misfortune  of  a  small  yield  is  normally  reduced  by  the 
advantage  —  to  the  producer  —  of  a  high  price ;  the  two  com- 
pensating factors  working  to  moderate  those  fluctuations  of  income 
which  are  the  bane  of  the  agricultural  industry.  The  advantage 
is  not  all  with  the  local  market.  Prices  are  apt  to  be  steadier  in  a 
world  market,  because  the  latter  reflects  conditions  over  a  wider 
area.  For  this  reason  it  would  be  unwise  to  endanger  our  foreign 
markets  by  tariff  wars  or  oppressive  railway  regulation.  But 
such  pressure  as  can  legitimately  be  exerted  at  the  present  time 

1  H.  C.  Taylor,  The  Decline  of  Landowning  Farmers  in  England,  p.  61. 


544  OUTLINES   OF  ECONOMICS 

should  be  employed  to  bring  the  miller,  the  brewer,  the  cotton 
manufacturer,  the  packer,  and  the  consumer  closer  to  the  farm. 
If  caution  and  expert  knowledge  are  employed,  this  can  be  done 
without  crippling  those  transportation  agencies  which  have  given 
the  American  farmer  entry  to  the  markets  of  Europe  and  the 
Orient,  and  which  must  be  preserved  in  order  to  prevent  too  exclu- 
sive a  reliance  upon  local  demand.  A  local  market  as  the  regular 
outlet,  and  a  foreign  market  as  a  potential  outlet,  is  the  condition 
of  maximum  safety. 

Railway  tariffs  which  favor  through  traffic  at  the  expense  of 
local  traffic  are  largely  if  not  mainly  responsible  for  the  concen- 
tration of  manufactures  and  population  in  the  large  cities.  For 
many  years,  Southern  cotton  mills  reaped  little  or  no  advantage, 
so  far  as  the  price  of  cotton  was  concerned,  from  their  proximity 
to  the  source  of  supply,  but  paid  as  much  or  even  more  for  cotton 
than  their  competitors  in  New  York.  The  railways  are  not  wholly 
responsible  for  this  condition  of  affairs.  In  England,  particularly, 
representatives  of  the  agricultural  interests  have  criticised  the  rail- 
ways for  accepting  lower  rates  from  the  seaboard  to  interior  points, 
than  on  local  traffic  from  intervening  stations  to  the  same  desti- 
nation, when  the  difference  was  fully  explained  by  the  larger 
size  of  the  seaboard  shipments,  their  more  convenient  package, 
and  the  great  expense  of  picking  up  small  consignments  of  freight 
at  numerous  local  way  stations.  And  competition  forces  railways 
frequently  to  accept  lower  rates  for  long  than  for  short  hauls  over 
the  same  road.  But  there  can  be  little  doubt  that  American  rail- 
ways have  charged  the  local  traffic  much  more  than  their  necessity 
compelled  them  to  charge,  particularly  in  the  South;  and  there  are 
few  reforms  on  the  side  of  marketing  which  American  farmers 
could  demand  with  more  equity  or  secure  with  greater  social  profit 
than  the  rehabilitation  and  revitalization  of  the  long  and  short 
haul  clause  of  the  Interstate  Commerce  Act,  emasculated  by  the 
Supreme  Court  decision  in  the  Alabama  Midland  Case  (168  U.S. 
144,  173).  This  might,  however,  involve  certain  pains  of  read- 
justment. 

At  present  there  is  a  great  gap  between  the  farmer  and  the  con- 
sumer of  his  products  which  is  bridged  by  a  complicated  trad- 


AGRICULTURAL   PROBLEMS  545 

ing  or  distributive *  mechanism  composed  of  railways,  storage 
companies,  commission  merchants,  brokers,  and  other  middlemen. 
In  the  distribution  of  the  great  staple  products,  the  commission 
merchant  is  rapidly  being  forced  out,  and  fortunately  so:  he  was 
unprogressive,  uneconomical,  and  too  often  betrayed  the  interests 
of  his  client  by  systematic  overcharges  for  insurance,  hauling,  and 
storage,  by  buying  consignments  on  his  own  account  when  market 
conditions  were  unusually  favorable,  and  selling  at  the  loss  of  the 
owner  when  the  market  was  particularly  bad.  In  the  marketing 
of  perishable  goods  the  commission  system  has  a  more  tenacious 
hold,  but  even  here  it  has  been  partly  replaced  by  cooperative 
associations  of  farmers  or  growers  such  as  the  California  Fruit 
Growers  and  Shippers'  Association,  which  maintains  auction 
rooms  in  eastern  cities  and  sells  its  own  products  direct.  The 
Southern  California  Fruit  Exchange,  to  cite  a  single  illustration, 
in  a  few  years'reduced  the  cost  of  marketing  California  fruits  from 
10  to  3  per  cent  of  the  sales  value. 

The  cooperative  marketing  association  and  the  intermediate 
trader  who  buys  from  the  grower  and  sells  to  the  consumer,  have 
in  common  two  points  of  superiority  over  the  commission  system; 
(a)  they  replace  the  zeal  of  an  agent  by  the  care  and  solicitude  of 
an  owner;  (b)  and  by  shipping  in  large  quantities  they  are  in  posi- 
tion to  obtain  much  better  rates  from  the  railways,  to  say  nothing 
of  the  other  economics  affected  by  handling  goods  on  a  large  scale.2 
Whether  the  cooperative  association  will  force  the  commission 
merchant  out  of  business  in  the  marketing  of  fruits  and  vegetables 
is  a  point  which  cannot  be  settled  here.  But  there  can  be  little 
doubt  that  the  farmer  has  gained  enormously  by  the  substitution 
of  the  trader  for  the  commission  house  in  the  marketing  of  the  great 
staple  products.  The  trader  comes  almost  to  the  door  of  the 
farmer,  with  constant  bids  for  his  grain.  He  is  an  expert  in  rail- 
way rates,  in  constant  telegraphic  communication  with  the  great 
markets  of  the  world,  and  handles  products  in  such  large  quantities 

1  The  word  "distributive"  is  used  in  the  popular  sense  in  this  chapter. 

2  The  cooperative  marketing  associations  have  also  effected  great  economies 
by  watching  prices  in  all  markets  carefully  and  distributing  their  consignments 
so  as  to  get  the  highest  prices  obtaining  at  the  time. 

2N 


546  OUTLINES   OF  ECONOMICS 

as  to  reduce  intermediate  expenses  to  a  minimum.  Occasionally, 
as  has  sometimes  been  the  case  with  the  great  line  elevator  com- 
panies, he  works  in  conjunction  or  in  collusion  with  the  railways, 
overbidding  the  small  grain  dealer,  and  forcing  the  railway  to 
grant  rebates  on  the  large  shipments  which  he  commands.  Even 
in  this  case,  the  farmer  gains  by  the  size  and  efficiency  of  the 
middleman  (though  the  small  dealer  may  suffer)  because  part  of 
the  economies  effected  —  even  those  effected  by  the  discriminative 
railway  rates  —  will  come  to  him  in  the  long  run.  Cases  of  mo- 
nopolistic oppression  are  theoretically  possible  when  there  is  only 
one  buyer  and  one  railway  who  are  in  collusion,  and  the  farmer 
is  deprived  —  because  of  high  railway  rates  —  from  shipping  his 
products  elsewhere.  But  the  loss  to  the  farmer  through  extortion 
of  this  kind  has  in  general  been  much  more  than  counterbalanced 
by  the  striking  economies  effected  by  the  great  trading  companies; 
though  this,  of  course,  affords  no  justification  either*  for  monopoly 
or  railway  discrimination.  Both  should  be  suppressed,  if  possible ; 
but  in  such  a  way  as  to  save  for  the  farmer  the  distributive  econo- 
mies effected  by  large-scale  handling. 

Speculation.  —  The  modern  marketing  or  distributive  mechan- 
ism not  only  relieves  the  producer  of  a  large  part  of  the  specula- 
tive risk  which  attends  the  transmission  of  raw  material  from  the 
farm  to  the  consumer,  and  calls  public  attention  to  this  speculative 
element  by  collecting  or  concentrating  it,  but  it  is  responsible  also 
for  a  large  amount  of  unnecessary  speculation  which  many  persons 
believe  to  be  particularly  injurious  to  the  farmer.  We  are  not  here 
concerned  with  the  general  evils  of  speculation  but  with  the 
prevalent  belief  that  dealing  in  options  and  futures  tends  to  re- 
duce prices.  "  What  is  generally  urged  is  that  the  professional 
short  seller,  by  his  sales  of  fictitious  wheat  or  cotton,  creates  a 
fictitious  oversupply  in  the  market,  which  is  just  as  instrumental 
in  depressing  prices  as  would  be  an  abnormally  large  supply  of 
actual  wheat  thrown  on  the  market  by  the  farmer."  l  This  charge 
is  frequently  supplemented  by  the  assertion  that  it  requires  less 
money  in  margins  to  "  sell  short  "  —  or  gamble  on  a  fall  in 

1  N.  I.  Stone  in  the  Report  of  the  Industrial  Commission,  Vol.  VI,  p.  189  ff., 
from  which  the  other  quotations  cited  in  this  section  are  also  taken. 


AGRICULTURAL   PROBLEMS  547 

prices  —  than  to  "  sell  long  "  in  anticipation  of  a  rise,  and  that, 
in  consequence,  the  weight  of  the  speculative  dealing  in  farm 
products  is  exerted  in  the  direction  of  lower  prices. 

This  particular  charge  against  speculation  is  confirmed  neither 
by  a  priori  reasoning  nor  by  inductive  analysis.  Every  "  ficti- 
tious "  sale  of  wheat,  to  use  that  as  an  illustration,  must  be  balanced 
by  an  equivalent  "  fictitious  "  purchase.  The  "  bear  "  who  sells 
October  wheat  in  July,  even  though  he  may  hope  to  depress  the 
price  of  October  "  futures,"  exercises  no  harmful  influence  upon 
the  actual  July  or  "  spot  "  price,  which  is  controlled  by  the  demand 
for  and  supply  of  actual  wheat;  and  when  October  comes,  "  the 
short  seller  of  July  appears  now  as  a  buyer  in  order  to  cover  his 
contracts,  and  if  his  trading  has  any  effect  on  the  market  at  all, 
it  is  to  increase  the  demand,  not  the  supply." 

It  is  very  plain  that  the  fictitious  market  may  be  artificially 
influenced  by  speculative  deals,  but  as  a  general  thing  the  fictitious 
market  is  ruled  by  the  actual  market,  not  vice  versa  ;  and  the  only 
influence  exerted  by  gambling  in  futures  upon  "  spot  "  prices  (with 
which  alone  the  farmer  is  concerned)  is  a  good  influence.  This 
influence  arises  out  of  the  effect  of  future  transactions  in  equalizing 
consumption  and  in  modifying  present  use  by  anticipating  future 
necessity.  And  the  complaint  that  it  requires  less  capital  to  "  bear  " 
the  market  than  to  "  bull  "  it,  as  well  as  a  great  number  of  ingen- 
ious criticisms  of  a  similar  kind,  would  all  be  negatived  —  if  they 
were  true  —  by  the  inevitable  consequence  that  any  permanent 
factor  of  this  kind  would  be  quickly  appreciated  by  speculators  and 
fully  discounted.  In  no  market  are  influences  of  this  kind  so 
accurately  detected  and  so  quickly  dissipated  by  competitive 
forces  as  on  the  produce  and  cotton  exchanges. 

Actual  investigations  of  prices  confirm  the  theoretical  argument 
made  above.  The  average  prices  of  spot  wheat  in  September, 
October,  and  November  —  just  after  harvest,  when  the  ordinary 
farmer  is  compelled  to  sell  —  have  been  nearer  the  average  price 
for  the  entire  year,  since  the  wheat  market  has  become  highly 
speculative,  than  it  was  in  the  forties  and  fifties  when  wheat  was 
sold  like  any  other  farm  product.  And  there  are  reasons  for  the 
belief  that  speculation  has  not  only  equalized  yearly  fluctuations, 


548  OUTLINES   OF  ECONOMICS 

but  that  the  leveling  has  been  up,  not  down,  in  the  interest  of  the 
farmer  who  is  compelled  to  sell  after  harvest,  as  opposed  to  the 
wealthier  miller  or  trader  who  in  the  past  carried  over  a  supply 
for  the  lean  months.  "It  is  not  uncommonly  stated  that  in  the 
last  few  years  futures  in  the  wheat  market  have  not,  in  the  long 
run,  stood  enough  above  "  spots  "  to  cover  all  the  expenses  of 
carrying.  Some  suggested  reasons  for  this  are:  cut  charges  for 
storage;  the  failure  of  outside  speculation  to  maintain  the  market 
against  hedging  sales;  the  fact  that  the  great  elevators  will  buy 
wheat  and  carry  it  for  what  they  can  get,  and  perform  the  functions 
of  both  carrier  and  trader  for  the  commission  of  one.  In  any  case, 
the  tendency  is  to  bring  all  prices  together."  1 

Education  and  Organization.  —  Again  and  again,  in  studying 
the  problems  of  agriculture,  we  come  back  to  the  conclusion  that 
the  real  evils  which  beset  agriculture  are  to  be  remedied  not  merely 
by  destroying  monopoly,  and  still  less  by  suppressing  speculation, 
or  increasing  the  money  supply,  but  by  education,  using  that 
word  in  its  most  catholic  sense.  The  laws  that  are  worth  passing, 
the  customs  that  are  worth  introducing,  the  institutions  that  are 
worth  establishing,  are  those  that  educate,  —  though  curiously 
enough  most  of  these  require  for  their  realization  a  preliminary 
campaign  of  education.  In  the  final  analysis,  agricultural  better- 
ment comes  back  to  the  will  and  ideals  of  the  individual  farmer, 
and  the  supreme  value  of  education  lies  in  its  power  to  prick  the 
ambition,  energize  the  will,  and  awaken  the  pride  of  the  farmer. 

It  would  be  impossible,  within  the  limits  of  this  chapter,  to  dis- 
cuss the  subject  of  agricultural  education;  and  the  reader  is  doubt- 
less familiar  with  the  work  done  by  the  United  States  Department 
of  Agriculture  and  the  experiment  stations,  the  agricultural  colleges 
and  their  traveling  lecturers,  farmers'  institutes,  farmers'  bulle- 
tins, and  short  (winter)  courses  for  working  farmers.  Scientific 
research  and  agricultural  education  of  the  more  advanced  type 
are  now  fairly  well  provided  for.  The  urgent  demand  at  present 
is  for  better  education  of  the  elementary  and  secondary  grades. 
The  public  expenditures  for  research  and  advanced  education  that 

1  H.  C.  Emery,  Speculation  on  the  Stock  and  Produce  Exchanges  of  the  United 
States,  p.  131. 


AGRICULTURAL  PROBLEMS  549 

have  been  made  in  the  past  have  been  richly  remunerative.  Simi- 
lar appropriations  for  elementary  instruction  in  agriculture  would 
probably  prove  even  more  profitable.  Above  all,  the  district 
school  should  be  improved,  and  interest  in  agriculture  awakened 
by  the  intelligent  introduction  of  nature  study  and  rudimentary 
agriculture.  The  country  must  learn  to  interest  and  keep  the  high- 
est talent  which  it  produces,  instead  of  packing  off  the  brightest 
boys  to  the  cities.  And  above  the  district  school,  institutions  of  a 
higher  grade  must  be  developed,  in  which  agriculture  shall  occupy 
the  same  place  that  manual  training  does  in  the  best  of  our  city 
trade  schools. 

"To  bridge  the  institutional  gap  between  the  public  schools  and  the  agri- 
cultural college  there  is  nothing  in  the  American  system  of  agricultural 
education  corresponding  in  completeness  to  that  in  operation  in  France. 
There  agricultural  education  begins  in  the  rural  primary  schools,  from  the 
ages  of  7  to  9,  with  the  simplest  facts  of  agriculture,  such  as  first  lessons  in  the 
garden ;  from  9  to  1 1  years,  soils,  fertilizers,  tillage,  and  the  ordinary  imple- 
ments; from  ii  to  13  years,  more  methodical  instruction,  in  tillage,  drainage, 
implements,  fertilizers,  sowing,  harvesting,  domestic  animals,  horticultural 
propagation,  tree  culture,  and  grafting.  After  13,  advanced  courses  for 
boys  and  girls  include  practical  ideas  and  operations  in  the  leading  phases 
of  agriculture.  The  rural  primary  schools  have  about  3400  gardens  attached 
to  them.  There  are  160  of  the  superior  primary  schools,  with  more  than 
15,000  pupils  receiving  instruction  in  agriculture."  l 

9 

"The  farm  problem,"  it  has  been  truly  said,  "consists  in 
maintaining  upon  our  farms  a  class  of  people  who  have  succeeded 
in  procuring  for  themselves  the  highest  possible  class  status,  not 
only  in  the  industrial,  but  in  the  political  and  social  order  —  a 
relative  status,  moreover,  that  is  measured  by  the  demands  of 
American  ideals."  2  To  secure  and  maintain  such  a  status,  edu- 
cation in  the  ordinary  sense  is  not  enough.  Education  must  be 
supplemented  by  a  multitude  of  social  organizations,  quickening, 
enlightening,  and  solidifying  the  agricultural  classes.  A  great 
variety  of  such  organizations  are  already  in  the  field,  from  the 
county  teachers"  and  patrons'  associations  designed  to  unite  pupil, 

1  Final  Report  of  the  Industrial  Commission,  p.  130. 

2  K.    L.    Butterfield,    President   of   the    Massachusetts   Agricultural    College, 
Chapters  in  Rural  Progress,  p.   15. 


550  OUTLINES   OF  ECONOMICS 

teacher,  and  parent  in  a  crusade  for  broader  and  deeper  culture, 
to  organizations  like  the  Patrons  of  Husbandry,  whose  first  aim, 
as  enumerated  in  its  Declaration  of  Purposes,  is  "to  develop  a 
better  and  higher  manhood  and  womanhood  among  ourselves." 
Limitations  of  space  forbid  any  extended  description  of  the  vitally 
important  work  which  organizations  of  this  kind  are  doing  for  the 
agricultural  classes;  but  it  may  be  possible,  in  conclusion,  to 
correct  one  or  two  misapprehensions  which  are  widely  prevalent 
concerning  the  nature  and  vitality  of  farmers'  organizations.  The 
National  Grange  will  serve  as  a  good  illustration. 

Founded  just  after  the  Civil  War  (1867)  in  order  "  to  restore 
kindly  feelings  "  between  the  people  of  the  North  and  the  South, 
this  organization  is  still  strong  and  vigorous,  having  in  1905  more 
than  220,000  members  in  the  five  leading  Grange  states.  Despite 
a  popular  impression  that  the  Grange  is  a  partisan  political  organ- 
ization, addicted  to  radical  ideas  and  Utopian  schemes  of  reform, 
its  principal  activities  are  social  and  educational  in  the  best  sense, 
and  discussion  of  political  or  religious  questions  at  its  meetings 
is  prohibited  by  the  organic  law  of  the  order.  "It  is  based  on 
correct  principles:  organization,  cooperation,  education.  It  is 
neither  a  political  party  nor  a  business  agency.  It  is  progressively 
conservative  —  or  conservatively  progressive.  It  is  neither  ultra- 
radical  nor  fo/ever  in  the  rut.  Its  chief  work  is  on  cultural  lines. 
It  includes  the  entire  family.  It  is  now  growing,  and  there  is 
every  reason  for  thinking  that  this  growth  is  of  a  permanent 
character."1 

QUESTIONS 

1.  Make  a  list  of  the  economic  factors  which  regulate  the  size  of  farms. 
Is  the  average  farm  likely  to  grow  larger  or  smaller  with  the  passage  of  time  ? 
Is  the  narrow  economic  conclusion  concerning  the  size  of  the  farm,  based  upon 
maximum  net  profit  to  the  individual  farmer,  subject  to  modification  by 
reason  of  social  or  moral  considerations  ? 

2.  Has  the  net  effect  of  the  rural  exodus  been  favorable  or  unfavorable 
to  agriculture  and  the  agricultural  classes  ?  to  society  generally  ? 

3.  Does  the  increase  of  tenancy  in  the  Southern  states  represent  progress 
or  retrogression  ?  in  the  North  Central  states  ? 

4.  Under  what  conditions  is  the  cash  rental  superior  to  share  tenancy? 

1  Ibid.,  p.  161. 


AGRICULTURAL   PROBLEMS  551 

Would  the  "corn  rent"  —  or  a  sliding  rental  varying  with  the  price  of  farm 
products  —  be  superior  to  both  ?  Are  short  leases  better  than  long  leases 
for  the  landlord  ? 

5.  Do  the  farmers  in  your  locality  suffer  from  the  lack  of  credit  facilities? 
Have  they  any  difficulty  in  finding  safe  and  convenient  investments  for  their 
savings  ? 

6.  What  is  the  advantage  of  specialized  farming  over  diversified  farming? 
Do  we  imply,  when  we  advocate  diversified  farming,  that  the  farmer  should 
"buy  nothing  that  he  can  raise  or  make  for  himself  " ? 

7.  Is  speculation  a  "necessary"  or  an   "unnecessary  evil"?     Do  the 
farmers  suffer  more  or  less  than  other  classes  from  speculation  on  the  produce 
exchanges  ? 

8.  Is  any  attention  paid  to  agriculture  in  the  elementary  schools  of  your 
locality  ?     Would  large  public  expenditures  for  the  improvement  of  ele- 
mentary education  probably  prove  profitable  in  the  long  run  ? 

REFERENCES 

BUTTERFIELD,  K.  L.     Chapters  in  Rural  Progress. 

Eleventh  Census.  "  Real  Estate  Mortgages :  Farms  and  Homes,  Pro- 
prietorship and  Indebtedness." 

Twelfth  Census,  Vol.  V.  Agriculture.  Special  Reports,  Supplementary 
Analysis,  "The  Negro  Farmer,"  pp.  511-579. 

DICKSON,  ADAM.     The  Husbandry  of  the  Ancients. 

HAGGARD,  H.  RIDER.     Rural  England. 

JEBB,  L.     The  Small  Holdings  of  England. 

MARSHALL,  ALFRED.     Principles  of  Economics  (5th  ed.),  Book  VI,  Chap.  X. 

MILL,  J.  S.     Principles  of  Political  Economy,  Book  II,  Chaps.  VI-X. 

PROTHERO,  R.  E.     The  Pioneers  and  Progress  of  English  Farming. 

Publications  of  the  U.S.  Department  of  Agriculture.  Year  Book,  The  Crop 
Reporter. 

Report  of  the  Industrial  Commission,  Vols.  VI,  X,  XI,  and  XIX,  pp.  43-200. 

ROGERS,  A.  S.  L.     The  Business  Side  of  Agriculture. 

ROGERS,  J.  E.  T.     History  of  Agriculture  and  Prices  in  England. 

TAYLOR,  H.  C.  Agricultural  Economics,  and  "  The  Decline  of  Landowning 
Farmers  in  England,"  Bulletin  of  the  University  of  Wisconsin,  No.  96. 


BOOK   III 
PUBLIC   FINANCE 


CHAPTER    XXXH 
PUBLIC    EXPENDITURES 

Introductory.     Nature  and   Significance  of  Public  Finance. — 

Public  finance  deals  with  the  revenues  of  government,  with  their 
expenditure  and  their  administration.  Public  finance  is  one  part 
of  economics.  Like  general  economics,  it  deals  with  the  means 
for  the  satisfaction  of  human  wants.  Some  of  our  wants  we  sat- 
isfy in  one  way,  some  in  another.  Some  we  satisfy  individually. 
Some  we  satisfy  through  private  associated  effort,  especially 
through  the  private  corporation.  Others  we  satisfy  through 
public  collective  effort,  that  is  to  say,  through  some  governmental 
agency.  The  wants  which  we  satisfy  through  governmental 
agency  are  not  all  of  them  so  peculiar  that  they  could  not  be  sat- 
isfied either  through  private  individual  activity  or  private  asso- 
ciated activity.  Let  us  take  the  case  of  watering  the  streets. 
There  are  places  in  which  the  streets,  in  so  far  as  they  are  watered 
at  all,  are  watered  by  individuals  in  their  private  capacity,  each 
man  watering  the  street  in  front  of  his  own  house  with  his  own 
hose.  There  are  other  places  in  which  the  householders  join 
together  and  pay  some  one  to  water  the  streets  for  them,  and  do 
this  privately.  There  are  still  other  cities  in  which  the  city  gov- 
ernment employs  persons  to  water  the  streets  and  pays  them  from 
the  proceeds  of  taxation. 

There  are,  to  be  sure,  some  wants  which  are  satisfied  through 
governmental  agency  and  which  a  civilized  community  will  not 
allow  us  to  satisfy  privately.  This  is  the  case  with  those  wants 
which  are  satisfied  by  means  of  the  police  and  the  courts.  It  is  a 
peculiar  function  of  government  in  modern  times  to  provide  the 
inestimable  blessing  that  we  call  security  of  person  and  property. 
This  requires  economic  resources,  just  as  the  satisfaction  of  the 

555 


556  OUTLINES   OF  ECONOMICS 

other  wants  mentioned  does,  and  public  finance  has  to  do  with 
the  provision  of  these  resources. 

Public  finance,  then,  is  a  part  of  economics  because  it  deals 
with  the  satisfaction  of  wants  through  economic  resources.  It  is 
also  a  part  of  economics  because  it  has  its  influence  upon  the  pro- 
duction, the  distribution,  and  the  consumption  of  wealth.  But 
while  we  have  to  insist  that  public  finance  belongs  to  eco- 
nomics, it  is  more  separated  from  the  other  parts  of  economics 
than  they  are  from  each  other.  Inasmuch  as  it  deals  with  the 
satisfaction  of  wants  through  governmental  agency,  it  has  its  own 
peculiarities,  and  it  is  only  an  undue  emphasis  upon  these  pecul- 
iarities which  leads  some  writers  to  make  it  a  separate  science. 

The  significance  of  public  finance  may  be  brought  before  us; 
first,  by  examination  of  the  increasing  amount  of  public  revenues, 
and  second,  by  the  enormous  aggregate  of  these  revenues  at  the 
present  time.  Public  revenues  have  gone  on  increasing  during 
the  present  century  by  leaps  and  bounds.  An  illustration  is 
afforded  by  the  history  of  France.  Eighty  years  ago  the  public 
expenditures  of  France  reached  one  thousand  million  francs  for 
the  first  time,  or,  as  we  generally  say,  a  billion  francs.  There  was 
universal  astonishment  and  alarm,  just  as  there  was  when,  for  the 
first  time,  an  American  Congress  spent  a  billion  dollars  in  two 
years.  Never  since  the  time,  however,  when  the  public  expendi- 
tures of  France  first  amounted  to  a  thousand  million  francs  have 
they  been  so  small.  Gradually  they  increased  until  they  reached 
two  thousand  millions,  never  to  pass  below  that  mark;  then  they 
increased  until  they  touched  three  thousand  millions;  and  now 
the  national  expenditures  are  nearly  four  thousand  millions. 
Public  expenditures  at  the  present  time,  under  the  modern 
government,  amount  to  more  than  a  tenth  part  of  all  the  wealth 
produced.1 

1  This  estimate  (that  public  expenditures  equal  one  tenth  part  of  all  the  wealth 
annually  produced)  has  been  given,  but  it  must  be  a  very  considerable  under- 
estimate for  the  modern  nation.  We  in  reality  know  very  little  about  the  amount 
of  wealth  annually  produced  in  the  modern  nations  of  the  world.  But  such  data 
as  we  have,  and  familiar  observation,  are  sufficient  to  convince  us  that  the  wealth 
produced  is  not  ten  times  the  total  public  expenditures.  In  the  United  States, 
according  to  the  Report  of  the  Census  Office,  Wealth,  Debt,  and  Taxation,  the 


PUBLIC    EXPENDITURES  557 

Now  what  does  this  mean  ?  Does  it  signify  increasing  extrava- 
gance or  even  corruption  ?  Quite  the  contrary.  While  the  mod- 
ern government  is  far  from  perfect,  it  is  throughout  the  civilized 
world  probably  better  than  it  ever  has  been  before.  Taking  the 
civilized  world  as  a  whole,  there  probably  never  was  more  honest 
government  or  more  efficient  government  than  there  is  to-day. 
What  it  really  means  is  this :  We  are  living  in  a  period  of  increas- 
ing public  cooperation.  We  think  we  find  it  more  advantageous 
to  satisfy  certain  wants,  growing  in  number  and  significance, 
through  public  cooperation,  than  through  individual  effort  or  pri- 
vate cooperation.  This  is  the  chief  significance  of  the  increasing 
governmental  budget  throughout  the  civilized  world.  But  un- 
happily, militarism  in  its  various  phases  is  next  in  significance, 
and  is  the  chief  phase  of  public  expenditures  that  is  disquieting.1 
Educational  expenditures  afford  a  good  illustration.  They 
run  up  into  the  hundred  millions  in  the  modern  nation,  whereas, 
previously  to  this  century,  they  were  insignificant.  Expenditures 
for  police  protection,  for  public  lighting,  and  for  sanitation  are 
something  which,  so  far  as  any  expenditures  of  magnitude  are 
concerned,  belongs  to  this  century. 

Public  finance  has  another  significance.  Questions  of  social 
reform  are  now  connected  generally  with  financial  questions 
just  as  formerly  they  were  with  constitutional  questions.  Public 
finance  has  become  the  central  fighting  place  for  social  reform. 
The  question  of  protection  has,  from  the  earliest  days  in  this 
country,  been  connected  with  public  finance.  Police  regulation 
has  also  been  connected  with  fiscal  measures.  The  license  charge 
for  saloons  furnishes  an  illustration.  The  idea  of  police  power  is 

total  expenditures,  including  the  national  government,  states,  territories,  and  local 
subdivisions,  amount  to  over  $1,700,000,000.  This  would  make  a  per  capita 
expenditure  exceeding  $20,  if  the  population  of  the  country  is  estimated  at 
eighty  millions.  This  would  mean  $100  per  family  of  five;  and,  on  the  basis  of 
10  per  cent  for  such  a  family,  would  mean  an  average  annual  income  of  $1000. 
In  England  the  per  capita  expenditure  of  the  national  government  alone  is  over 
$15.50,  and  in  France  over  $17.  The  10  per  cent  estimate,  then,  is  clearly  an 
underestimate. 

1  This  topic  is  adequately  treated  by  Professor  Charles  J.  Bullock  in  his  article 
entitled  "The  Growth  of  Federal  Expenditures,"  in  the  Political  Science  Quarterly, 
Vol.  XVIII,  pp.  97-1 1 1. 


558  OUTLINES   OF  ECONOMICS 

expanding  in  the  United  States,  and  this  means  expansion  of  the 
field  of  public  finance.  The  discussion  of  public  expenditures 
reveals,  as  few  other  subjects  do,  the  nature  of  our  civiliza- 
tion. 

Expenditures  of  Public  and  Private  Economies  Contrasted.  — 
There  is  a  difference  between  public  and  private  economies  with 
respect  to  the  equilibrium  between  income  and  outgo.  Relatively, 
there  is  an  elasticity  of  government  revenues  and  an  elasticity 
of  government  expenditures.  This  finds  expression  in  the  state- 
ment that  public  revenues  are  gauged  according  to  expenditures; 
whereas,  in  the  private  economy,  the  household  expenditures  are  regu- 
lated by  income.  This  is  a  regular  rule  for  normal  conditions. 
It  is  abnormal  when  irregularities  in  public  income  lead  to  irregu- 
larities in  expenditures.  It  has  been  observed  by  a  critic  that 
this  principle  of  public  finance  is  true  in  a  legal  sense,  but  not  in 
an  economic  sense.  It  is  said  that  when  public  expenditure  is 
decided  upon,  then  we  legally  determine  the  income;  but,  eco- 
nomically, the  expenditures  of  the  state  rest  upon  a  foundation 
as  elastic  as  that  of  a  private  person.1  It  is  true  that  in  public 
expenditures  there  must  be  a  balancing  of  gain  and  sacrifice,  and 
that  in  the  case  of  a  particular  expenditure  it  must  be  weighed 
over  against  all  other  possible  expenditures,  not  only  public,  but 
private.  The  rich  state,  undoubtedly,  will  incur  expenditures 
from  which  a  poor  but  prudent  people  will  probably  shrink.  On 
the  other  hand,  a  private  person  is  not  to  be  thought  of  as  spend- 
ing necessarily  all  his  income,  even  if  he  gauges  his  expenditures 
by  income. 

Nevertheless,  roughly  speaking,  the  proposition  is  true  on  ac- 
count of  the  priority  of  the  claims  of  the  state.  This  has  been 
well  brought  out  by  critics  of  Henry  George,  who  advocated  the 
appropriation  of  economic  rent  for  public  expenditures.  Some 
of  Mr.  George's  followers  have  replied  to  the  objection  that  eco- 
nomic rent  might  not  be  sufficient  for  public  expenditures:  "  Then 
the  state  must  curtail  its  expenditures  as  the  private  person  would 
do."  When  we  think  about  it,  we  find  that  certain  public  ex- 
penditures must  be  made  and  must  take  prior  claim.  However, 
1  Cohn,  Finanzwissenschaft,  S.  184. 


PUBLIC   EXPENDITURES  559 

when,  as  is  so  often  the  case  in  cities,  there  is  an  income  strictly 
limited  by  the  tax  rate,  we  frequently  have  a  case  like  that  of 
a  man  with  a  limited  and  inadequate  income.  This  is  an 
unfortunate  situation  for  cities;  but  the  case  of  a  national 
government  which  did  not  have  a  prior  claim  upon  wealth  for 
defense  would  be  anomalous. 

Closely  connected  with  what  has  been  said,  we  find  various 
differences  due  to  the  sovereignty  of  the  state  and  its  perpetual 
life.  The  state  orders  a  citizen  to  give  up  a  part  of  his  possessions, 
and,  indeed,  frequently  fixes  prices.  And  a  peculiarity  in  all 
states  determining  prices  for  property  and  services  is  that  they 
must  be  determined  by  criteria  of  fairness,  inasmuch  as  by  the 
very  hypothesis  competition  is  wanting  wholly  or  in  part.  Con- 
sequently, we  find  courts  and  legislatures  much  occupied  with  the 
determination  of  what  is  "fair  and  reasonable."  The  perpetual 
life  of  the  state  has  to  be  kept  in  mind  m  a  great  variety  of  ex- 
penditures. It  is  the  special  function  of  the  state  to  provide  for 
future  generations,  and  this  is  seen,  for  example,  in  forestry  and 
in  care  for  rivers  and  harbors. 

There  is  a  difference  between  public  and  private  economies  in 
the  means  of  measuring  the  utilities  resulting  from  expenditures. 
It  is  at  once  admitted  that  all  expenditures  of  states  and  of  private 
persons  should,  in  a  large  sense,  be  productive.  Waste  is  every- 
where an  economic  wrong,  but  productive  e\penditures  mean 
simply  useful  expenditures.  What  the  state  produces  is  largely 
immaterial  services,  and  these  have  no  market  price.  How  can 
we  tell  whether  they  are  socially  profitable  or  unprofitable  ?  They 
are  not  worth  while  if  they  result  in  a  sacrifice  of  other  expendi- 
tures which  would  yield  larger  satisfactions.  It  is  a  special  func- 
tion of  the  legislative  body,  in  a  constitutional  state,  to  decide  upon 
the  relative  advantages  of  various  possible  public  expenditures, 
and  to  weigh  these  over  against  the  advantages  of  private  expendi- 
tures which  might  have  been  made  if  the  money  permitting  the 
expenditures  had  been  left  in  private  pockets.  When  a  certain 
sum  is  taken  from  me  by  taxation,  it  results  in  a  public  expendi- 
ture instead  of  a  private  expenditure  which  might  have  been 
made.  This  is  only  another  way  of  saying  that  public  expendi- 


560  OUTLINES   OF  ECONOMICS 

tures  are  largely  from  income  which  is  derivative.  Private  indi- 
viduals secure  an  income  and  then  yield  a  part  of  it  for  public 
purposes.  These  contributions  are  compulsory.  On  the  other 
hand,  there  are  economists  who  look  upon  the  state  as  a  factor  in 
production,  and  hold  that  what  is  paid  in  taxes  is  less  than  what 
corresponds  to  the  cooperative  activity  of  the  state  in  the  mainte- 
nance of  law  and  order  and  in  other  services.  The  special  social 
significance  of  public  expenditures  is  that  their  aim  is  inclusive, 
normally  and  regularly;  whereas,  normally  and  regularly,  the 
aims  of  private  expenditures  are  more  or  less  exclusive.  A  pub- 
lic library  contrasted  with  a  scholar's  private  collection  of  books 
illustrates  this  point. 

All  these  differences  are  considerable,  and  they  give  us  perhaps 
at  least  one  reason  why  business  men  are  so  often  a  disappoint- 
ment in  an  official  capacity.  The  public  financier  must  be  gov- 
erned by  the  public  point  of  view;  and  there  are  many  points  at 
which  this  diverges  from  the  private  point  of  view.  The  true 
statesman  is  one  who  has  the  public  point  of  view,  and  yet  is 
able  to  avail  himself  of  the  knowledge  and  experience  of  private 
business. 

The  Proper  Proportion  between  the  Total  Income  of  Society  and 
Public  Expenditures.  —  We  notice  actual  changes  in  this  propor- 
tion, and  we  discover  that  further  changes  are  advocated,  running 
all  the  way  from  the  anarchist  position,  which  would  abolish  gov- 
ernment and  public  expenditures,  to  socialism,  which,  by  making 
production  and  distribution  public  functions,  would  make  public 
expenditures,  broadly  construed,  nearly  equal  to  the  total  wealth 
production. 

An  attempt  has  been  made  by  those  who  take  a  less  extreme 
position  than  either  of  these  to  give  an  estimate  of  what  is  a  large 
public  expenditure,  what  a  small  expenditure,  what  is  desirable, 
undesirable,  or  even  intolerable.  Generally  these  estimates  are 
made  with  respect  to  the  maximum  expenditure,  but  we  could 
equally  well  raise  the  question  with  respect  to  the  minimum. 
One  writer  speaks  of  public  expenditures  of  16  per  cent  as  average, 
and  25  per  cent  as  excessive.  Another  regards  public  expendi- 
tures which  consume  15  per  cent  of  the  total  annual  wealth  pro- 


PUBLIC   EXPENDITURES  561 

duction  as  the  upper  limit.  In  our  American  practice,  we  very 
generally  attempt  to  limit  the  percentage  of  direct  taxes.  But 
the  upper  limits  are  based  on  valuation  of  property  and  not  on 
income;  while  state  constitutions  very  frequently  limit  state  ex- 
penditures, and  also  expenditures  of  cities  and  other  local  units. 
For  local  purposes  in  the  United  States,  we  have  roughly  a  limit 
of  £  to  2  per  cent  of  the  valuation  of  property.  Total  taxation 
of  real  property  frequently  runs  in  the  United  States  from 
10  per  cent  to  even  20  per  cent  of  the  net  profits,  and  indeed 
not  infrequently  goes  a  great  deal  beyond  that.  The  truth  is, 
that  it  is  absolutely  impossible  to  give  any  general  answer  to  the 
question,  "What  is  the  proper  proportion  between  the  total  in- 
come of  society  and  public  expenditures?"  Variations  in  the 
wealth  of  a  country  have  to  be  considered,  and  these  mean  much 
when  the  question  of  additional  expenditure  is  raised.  Variations 
in  tax  systems  and  the  consequent  distribution  of  the  burden  of 
taxation  make  a  wide  difference.  In  times  of  distress,  more  can 
be  expended  than  on  ordinary  occasions.  When  the  national  life 
of  the  state  is  endangered  in  a  war,  expenditures  will  be  incurred 
which  would  be  impossible  at  any  other  time,  simply  because,  for 
any  other  reason,  the  people  would  not  submit  to  the  sacrifice 
involved. 

But  there  are  other  points  of  view  which  go  still  deeper.  Why 
do  we  spend  money  at  all  through  the  state?  Obviously  to  sat- 
isfy needs.  How  much  we  should  spend  publicly  depends  upon 
what  needs  are  satisfied  publicly.  We  have  to  ask  and  answer 
the  question,  "What  position  do  these  needs  hold  among  our 
needs  in  general?"  "Do  they  belong  to  our  necessities  or  super- 
fluities?" When  we  consider  public  expenditures  in  the  broadest 
terms,  we  must  take  into  account  the  amount  of  production  which 
is  carried  on  by  the  state  —  employing  this  term  "state"  here  as 
elsewhere  in  its  generic  sense.  If  the  railways  (as  in  Germany) 
are  state  railways,  a  larger  percentage  of  the  expenditures  and 
revenues  of  the  country  are  public  in  character  than  would  be  the 
case  if  they  were  privately  owned  and  operated.  No  comparison 
of  expenditures  of  various  countries  can  have  any  value  if  it  does 
not  take  into  account  considerations  of  this  kind. 


562  OUTLINES   OF  ECONOMICS 

Professor  Adolph  Wagner 1  lays  down  this  rule,  which  is  helpful 
in  answering  the  question  as  to  the  proper  proportion  between 
the  income  of  society  and  public  expenditures  for  any  particular 
time  and  place:  "The  permissible  amount  of  public  expendi- 
tures, both  absolutely  and  relatively  considered,  will  vary  directly 
in  proportion  to  (a)  the  direct  economic  value  of  state  activities ; 
(6)  the  extent  to  which  it  promotes  the  productive  power  of  all ; 
(c)  the  absolutely  free  social  income;2  (d)  the  larger  the  part 
of  the  net  state  receipts  coming  from  the  quasi-private  acquisi- 
tion (railways  —  industries  in  general)  of  the  state  and  not  from 
taxes."  *  Fortunately,  how  much  we  shall  spend  presents  itself 
historically,  that  is,  with  respect  to  historical  conditions,  and 
has  reference  to  increments  or  decrements  of  expenditure.  The 
problem  is  far  easier  of  solution  than  it  would  be  otherwise. 

In  fact,  except  as  a  concrete  historical  problem,  it  is  impossible 
to  state  how  great  the  public  expenditures  should  be.  We  are 
now  in  a  position  to  understand  why  it  is  that  the  nations  of  the 
world  have  not  been  ruined  by  expenditures  which  even  a  genera- 
tion ago  would  have  been  thought  absolutely  crushing,  and  one 
hundred  years  ago  would  have  been  inconceivable.  We  satisfy 
our  needs  to  an  ever  increasing  extent  through  public  agencies. 
This  finds  expression  in  the  Law  of  Increasing  Public  Expendi- 
tures, given  by  the  same  writer  from  whom  we  have  just  quoted. 

"Comparisons  between  different  countries  and  different  periods 
show  regularly  among  progressive  nations  an  extension  of  public 
activities.  This  manifests  itself  extensively  and  intensively.  The 
state  and  its  subordinate  political  units  continually  undertake  new 
functions,  and  they  perform  their  duties,  old  and  new,  better  and  bet- 
ter. In  this  way,  that  is,  through  public  agency,  the  needs  of  the 
population,  to  an  increasing  extent,  especially  their  common  needs, 
are  satisfied;  and  the  public  services  for  the  satisfaction  of  needs 
continually  improve  in  quality.  The  clear  proof  of  this  is  given 

1  Finanzwissenchaft,  2te  A.,  Bd.  I,  S.  65. 

*  I.e.  beyond  and  above  what  is  needed  for  subsistence. 

*  This  means  public  ownership  of  enterprises  which  are  so  conducted  as  to 
yield  profits.     All  the  profits  can  and  indeed  must  be  expended  for  public  pur- 
poses, whereas,  if  the  industry  were  private,  only  a  part  of  the  profits  could  be  taken 
for  public  purposes. 


PUBLIC   EXPENDITURES  563 

statistically  in  the  increased  demands  made  by  the  state  and  the  sub- 
ordinate political  units."  1 

We  have  here  described  what  is  a  part  of  a  still  larger  move- 
ment, namely,  the  socialization  of  production  and  the  socializa- 
tion of  consumption.  It  is,  however,  the  socialization  of  con- 
sumption which  especially  confronts  us  in  public  expenditures. 
To  an  increasing  extent  what  is  consumed  by  the  family  is  pro- 
duced outside  the  family.  There  has  been  going  forward  a  great 
process  of  socialization,  and  this  finds  expression  in  part  in  public 
expenditures.  An  increasing  proportion  of  the  needs  of  the  fam- 
ily are  satisfied,  not  by  the  private  economy,  but  by  the  public 
economy,  and  satisfied  also,  as  Professor  Wagner  points  out,  not 
in  accordance  with  the  principles  of  private  economy,  which  is 
service  for  service,  but  in  accordance  with  the  principles  of  the 
public  economy,  which  is  a  general  return  for  that  which  is 
received. 

We  have  to  do  with  what  we  may  also  call  socialization  of  sup- 
ply. We  do  not  protect  ourselves  against  physical  violence,  but 
are  protected  by  the  state.  We  do  not  educate  our  own  children; 
they  are  educated  by  public  agency.  The  public  expenditures 
are  also  made  to  promote  art  and  all  the  higher  interests  of  life. 
The  services  which  the  federal  government  renders  us  in  the  post 
office  find  expression  in  public  expenditures.  Public  expenditures 
are  giving  us  more  beautiful  and  more  healthful  cities,  and  are 
satisfying  the  needs  which  arise  out  of  the  extensive  growth  of 
the  country,  in  its  expansion  geographically  and  in  the  size  of  the 
population,  and  also  the  needs  which  arise  from  an  intensive 
growth. 

The  significance  is  partly  in  increased  activity  of  the  state  and 
partly  in  the  incidence  of  the  cost  of  the  services  under  considera- 
tion. The  poor,  who  could  not  themselves  have  pleasure  grounds, 
enjoy  public  parks,  and  these  are  maintained  at  public  expense. 
So  we  may  take  up  one  service  after  another  and  find  that  wealth, 
produced  in  accordance  with  the  principles  of  the  private  economy, 
is  consumed  in  accordance  with  the  principles  of  the  public  econ- 

1  Wagner,  Allgemeine  Volkswirthschaftslehre,  Erster  Theil,  Grundlegung,  Ka£. 
4,  3  Hauptabsch.,  S.  310,  Bd.  I,  ate  A. 


564  OUTLINES   OF  ECONOMICS 

omy,  and  that  is  very  largely  in  accordance  to  needs  and  capacity 
for  use.  The  whole  public  educational  system,  from  the  country 
district  school  to  the  modern  state  university,  culminating  in  re- 
search and  investigation,  admirably  illustrates  this  principle. 

The  Principle  of  Economy  versus  Parsimony  in  Public  Expen- 
ditures. —  After  a  definition  of  economy  in  Webster's  International 
Dictionary,  we  find  the  following:  "Economy,  Frugality,  Parsi- 
mony. Economy  avoids  all  waste  and  extravagance,  and  applies 
money  to  the  best  advantage;  frugality  cuts  off  indulgences,  and 
proceeds  on  a  system  of  saving.  The  latter  conveys  the  idea  of 
not  using  or  spending  superfluously,  and  is  opposed  to  lavishness 
or  profusion.  Frugality  is  usually  applied  to  matters  of  consump- 
tion, and  commonly  points  to  simplicity  of  manners.  Parsimony 
is  frugality  carried  to  an  extreme,  involving  meanness  of  spirit  and 
a  sordid  mode  of  living.  Economy  is  a  virtue  and  parsimony  a 
vice." 

We  must  have  clear  ideas  as  to  which  course  of  the  three  we 
shall  follow,  for  it  is  scarcely  to  be  taken  for  granted  that  we  shall 
follow  the  course  of  extravagance.  There  is,  however,  danger  of 
indifference  as  to  the  size  of  public  expenditures,  and  extravagance 
may  result  therefrom.  While  scarcely  any  one  now  would  delib- 
erately advocate  extravagance  so  far  as  the  general  principle  is 
concerned,  extravagance  in  detail  might  be  advocated;  and,  in 
fact,  in  practice  we  find  both  indifference  and  extravagance. 
Sometimes  the  idea  that  extravagance  brings  money  into  circula- 
tion has  found  favor,  and  especially  has  been  used  for  the  justfi- 
cation  of  large  expenditures  by  royal  courts.  The  same  idea  has 
been  used  as  a  justification  for  luxury.  It  can,  however,  find  no 
support  in  economics.  There  is  danger  of  extravagance  because 
each  one  concerned  with  governmental  expenditures  feels  that 
what  he  spends  is  a  relatively  small  matter,  and  indeed  it  is.  It 
is  sometimes  thoughtlessly  overlooked  that  when  many  are  spend- 
ing, "  small  waste  "  becomes  significant,  and  may  be  even  ruinous. 
This  is  a  problem  which  concerns  every  large  business,  and  it  re- 
quires strict  and  wise  administration  to  avoids  the  two  extremes : 
wasteful  extravagance  and  red  tape. 

Sectionalism  also  results  in  extravagance,  and  this  shows  itself 


PUBLIC   EXPENDITURES  565 

badly  in  the  United  States  at  times.  Whatever  any  state  can  se- 
cure from  the  federal  Treasury  is  often  looked  upon  as  so  much 
clear  gain.  This  was  clearly  brought  out  in  the  discussions  con- 
cerning the  repayment,  a  few  years  ago,  of  the  direct  tax  that 
has  been  paid  by  the  states  to  the  federal  government.  This  tax 
has  now  been  repaid,  but  many  states  gave  agents  large  and 
extravagant  sums  to  work  for  the  refund.  Sometimes  sectional- 
ism manifests  itself  even  in  cities.  In  one  section  of  the  city 
there  may  be  vigorous  efforts  to  secure  money  for  itself  without 
due  regard  for  the  general  interest. 

The  peculiar  condition  of  our  federal  financiering  (which  is 
found  in  the  fact  that  the  taxes  are  kid  very  largely  for  other  than 
revenue  purposes,  and  that  there  is  no  careful  balancing  over  and 
against  one  another  of  probable  revenues  and  probable  expendi- 
tures) results  frequently  in  a  large  surplus  in  the  federal  Treasury. 
There  is  danger  of  extravagance  wherever  revenues  outrun  felt 
needs.  There  never  has  been  a  time  when  it  would  not  have  been 
possible  to  have  expended  wisely  the  entire  revenues  of  the  federal 
government;  e.g.,  the  telegraph  might  have  been  purchased,  and 
educational  expenditures  might  have  been  increased.  But  there 
was  no  demand  for  these  expenditures  strong  enough  to  prevail, 
and  the  outlet  was  found  along  the  lines  of  least  resistance,  or,  per- 
haps it  ought  rather  to  be  said,  along  the  lines  of  greatest  "  pull." 
We  may  then  lay  it  down  as  a  general  law  that  there  is  danger  of 
extravagance  whenever  public  revenues  outrun  felt  needs. 

There  is  a  tendency,  especially  wherever  public  spirit  is  not 
highly  developed,  to  favor  parsimony,  and  to  regard  that  as  the 
best  administration  which  spends  least,  and  the  smallest  tax  as 
the  best  tax.  This  idea  was  encouraged,  particularly  by  those  who 
looked  upon  government  expenditures  as  external  to  the  life  of  the 
people  —  as  if  they  were  expenditures  for  some  outside  person. 
This  idea,  indeed,  may  be  traced  back  to  monarchical  govern- 
ment and  to  a  time  when  royal  courts  consumed  a  large  part  of 
the  public  revenue.  The  smallest  expenditure  means  the  accom- 
plishment of  the  fewest  purposes.  Parsimony  means  meanness, 
and  can  never  be  the  rule  either  of  public  or  private  financiering. 
Frugality  is  the  rule  when  it  is  a  necessity.  Economy  is  the  sound 


566  OUTLINES   OF  ECONOMICS 

rule;  and  this  means  a  broad  and  liberal  policy  and  a  husbanding 
of  resources.  The  wise  citizen  judges  any  particular  administra- 
tion either  in  the  nation  or  the  state,  not  chiefly  by  the  amount  of 
public  expenditures,  but  by  the  results  of  public  expenditures, 
appreciating  full  well  that  increasing  public  expenditures  are  a 
normal  condition  in  a  sound  and  healthy  society. 

Development  of  Expenditures  and  the  Historical  Order  in 
which  they  Appear.  —  It  is  instructive  to  consider  the  historical 
order  in  which  the  objects  of  public  expenditure  appear.  This 
order  throws  a  strong  light  upon  the  evolution  of  industrial  society, 
and  of  civilization  in  general.  This  is  an  almost  unworked  field 
of  investigation,  but  it  is  an  extremely  interesting  and  important 
one.  This  order  can  be  presented  here  only  in  the  most  general 
terms,  and  in  these  terms  it  is  somewhat  as  follows:  expenditures 
for  (i)  external  security;  (2)  security  within  the  community;  (3) 
promotion  of  material  interests;  (4)  benevolence  (transferred  in 
part  from  the  Church  at  the  time  of  the  Reformation ;  (5)  educa- 
tion in  its  various  phases;  (6)  labor.  In  a  general  way  the  organi- 
zation of  the  departments  of  the  federal  government  corresponds 
with  this  order.  In  1789,  the  Treasury,  War,  and  State  depart- 
ments were  organized,  also  the  Department  of  Justice,  Supreme 
Court,  and  the  Navy  Department;  the  Post  Office  Department 
was  organized  as  a  distinct  department  in  1829;  the  Department 
of  the  Interior  was  organized  in  1849;  the  Department  of  Labor 
as  a  separate  department  (without  representation  in  the  Cabinet) 
in  1889;  the  Department  of  Agriculture  as  a  separate  department 
(with  representation  in  the  Cabinet)  in  1889;  the  Department  of 
Commerce  and  Labor  (with  representation  in  the  Cabinet)  in 
1903.  The  modern  nation  has  been  spending  an  increasing  pro- 
portion of  its  resources  for  education.  We  use  nation  in  the  gen- 
eral sense  here,  including  all  the  subdivisions  of  the  nation.  We 
find  a  rapidly  increasing  item  in  the  budget  of  the  modern  munici- 
pality for  public  libraries,  in  which  line  of  expenditure  the  United 
States  is  leading  the  world.  Lately,  in  the  modern  budget,  we 
find  expenditures  which  are  distinctively  for  the  promotion  of  the 
interests  of  labor. 

Most  interesting  is  it  to  observe,  within  the  last  few  years,  an 


PUBLIC   EXPENDITURES  567 

expenditure  in  the  national  budgets  for  international  agreements 
and  arrangements  to  promote  the  interests  of  labor.  In  1900,  the 
International  Association  for  Labor  Legislation  was  formed,  and 
its  permanent  Bureau  was  established  at  Basle,  Switzerland,  in 
1901.  As  the  competition  of  labor  and  capital  was  international, 
it  had,  in  the  opinion  of  many  careful  observers,  become  necessary 
to  safeguard  the  interests  of  labor  by  international  agreements. 
Consequently,  we  find  that  this  international  association  receives 
subsidies  from  most  European  governments,  and  a  small  one  from 
the  United  States  through  our  federal  Bureau  of  Labor.  And, 
in  1905,  as  we  have  already  seen,  an  international  treaty  was  en- 
tered into  by  Italy  and  France  for  the  advancement  of  the  inter- 
ests of  labor  and  for  mutual  protection  of  employers.  Small 
indeed  are  these  items,  but  they  are  significant  as  beginnings. 

We  must,  however,  analyze  the  public  expenditures  of  the  vari- 
ous departments  more  carefully  to  understand  fully  the  order  of 
development  in  the  objects  of  public  expenditures.  The  whole 
expenditure  of  the  Department  of  Agriculture  is  an  expenditure 
to  promote  material  well-being,  and  this  has  become  one  of  the 
great  departments  in  modern  government.  The  Department  of 
the  Interior  is  also  largely  concerned  with  expenditures  to  pro- 
mote the  general  material  welfare.  We  have  in  the  Department 
of  Agriculture  such  items  as  forestry,  food  adulteration,  botany, 
seed  tests,  pomology,  entomology,  agricultural  soils,  irrigation 
investigations,  and  road  inquiry. 

We  cannot  lay  down  any  hard  and  fast  line  between  public  and 
private  expenditures,  because  there  is  a  perpetual  shifting  from 
the  satisfaction  of  wants  privately  to  the  satisfaction  of  wants 
publicly,  and  sometimes  even,  though  less  frequently,  the  reverse 
process.  The  railways  of  Prussia  were  once  private,  and  their  re- 
ceipts and  expenditures  had  little  to  do  with  the  Prussian  budget. 
Now  the  receipts  are  public  receipts,  and  their  expenditures 
are  public  expenditures.  The  addition  to  the  budget,  however, 
means  necessarily  no  additional  burden  resting  on  the  people. 
Indeed,  if  the  people  are  well  served  and  served  for  a  lower  price 
than  formerly,  with  less  relative  cost  of  operation,  the  burdens  of 
the  people  have  been  lightened,  and  this  is  what  is  generally 


568  OUTLINES   OF   ECONOMICS 

claimed  in  Prussia.  Let  us  take  the  case  of  a  city  in  which  water- 
ing the  streets  is  a  private  matter  paid  for  by  private  subscription. 
The  expenditure  becomes  a  public  expenditure  when  the  city 
takes  upon  itself  this  function,  but  if  the  public  expenditure  is  no 
greater  than  the  private  expenditure,  there  is  no  additional  burden. 
If  the  service  is  better  performed,  and  the  total  burden  more 
fairly  distributed  by  taxation  than  by  private  subscription,  —  as 
sometimes,  at  least,  happens,  —  there  is  a  positive  gain.  The  in- 
creased density  of  population  has  been  mentioned  as  a  cause  of 
increased  public  expenditures.  A  suburb  without  any  municipal 
organization  may  maintain  electric  lights  in  the  streets  by  pri- 
vate subscription.  The  expenditure  appears  in  no  public  budget. 
This  suburb  secures  some  kind  of  a  municipal  organization,  and 
that  which  was  a  private  expenditure  becomes  a  public  expendi- 
ture. Again,  however,  there  is  no  increased  burden  resting  upon 
the  people;  their  wants  are  satisfied  through  a  different  channel. 
When  we  compare  modern  times  with  ancient  times,  we  find 
that  an  increasing  proportion  of  the  public  expenditures  are  in- 
curred for  objects  which  directly  benefit  the  people,  and  relatively 
a  decreasing  amount  for  objects  in  which  they  have  comparatively 
little  concern.  This  finds  most  striking  exemplification  in  a  com- 
parison of  the  budget  of  France  in  1789 1  with  the  budgets  of  1906 
and  1907,  which  we  take  simply  as  typical  modern  budgets.2 


EXPENSES  —  1  789 

LlVRES  ' 

Cost  of  collection   and  reimbursements  (does  not  include 
cost  of  collecting  taxes  farmed  out)  

71,478,000 

Consolidated  debt  —  included  portion  made  up  of  annuities 
Interest  etc    on  remaining  portion  of  debt        

162,486,000 

80.?  27  OOO 

Pensions                .           

20,560,000 

Royal  family  and  princes  

33.2,10.000 

Total  

337,201,000 

1  A  livre  is  slightly  less  than  a  franc  —  say  2  per  cent. 

1  Necker*s  "Budget,"  May,  1789,  rearranged  by  the  author  of  the  article  in  the 
Dictionnaire  des  Finances.  *  On  page  570. 


PUBLIC   EXPENDITURES 


"This  formed  the  total  deduction  before  provision  could  be 
made  for  general  service  of  the  government,"  in  which  we  have 
the  following  items  :  — 


EXPENSES  —  1789  (Continued) 

LIVRES 

War  

Marine  and  colonies  

Foreign  affairs  

Justice  

Interior   

Financial  administration  

Public  works,  agriculture,  and  commerce  

Public  instruction  and  fine  arts  

I  227  OOO 

Public  worship   ("  cultes  ")  

2  188  ooo 

Total  

I&A  6c?  ooo 

Brought  forward  

lit   2O  I  OOO 

Grand  total  

C2I   ClAA  OOO 

It  will  be  observed,  in  comparing  these  budgets,  that  the  French 
court  consumed  a  very  large  proportion  of  the  expenditures  of 
1789;  and  that  of  what  remained  a  very  large  proportion  was 
consumed  by  the  public  debt,  the  army  and  navy;  and  that  for 
education  and  the  promotion  of  general  welfare  the  expenditure 
was  relatively  insignificant.  A  study  of  the  table  on  next  page 
reveals  one  of  the  reasons  why_it  is  that  France  is  able  to  endure 
so  large  a  public  expenditure.  Wants  are  thereby  satisfied,  and 
what  is  expended  returns  to  the  people  in  services. 

The  view  here  presented  of  public  expenditures  is  undoubtedly 
one  which  is  reassuring.  The  impression  must  not  be  gathered 
from  this  that  there  is  no  need  for  care  and  watchfulness.  As 
public  expenditures  increase,  it  becomes  of  more  and  more  im- 
portance to  secure  wise  and  prudent  administration  of  all  our 
resources.  Wastefulness  becomes  more  serious  than  ever  before, 
and  the  benefits  from  excellence  in  administration  increase  cor- 
respondingly. Without  pronouncing  any  opinion  upon  what  is 


57° 


OUTLINES   OF  ECONOMICS 


called  imperialism,  we  may  also  say  that  the  enormous  increase  in 
expenditures,  in  one  way  or  another  connected  with  war,  which 
we  have  seen  during  the  past  few  years,  cannot  be  viewed  without 
misgiving.  Even  the  most  optimistic  Englishman  cannot  regard 
with  complacency  a  national  administration  approaching  in  its 
expenditures  £150,000,000  sterling,  when  over  one  third  is  for  the 


BRANCHES  OF  EXPENDITURES 

1907 

Francs 

1906 

Francs 

Finance  :  public  debt  

1,  277,  c  28,  064. 

1.232  411  OO2 

President,  Chamber,  Senate  .... 
Other  services  

19.337.500 

7O4,67i;,';2C 

13,942,500 
2O8,IOO  361 

Justice                         

78  7IO   2CO 

77  ,177   6OO 

Foreign  affairs  

19  I  IO  OOO 

17  68  C   760 

Interior  

104  066  146 

80  117  177 

War  

770,086,1  7Q 

718,690,882 

^Marine  

3121  69  8  1  o 

72C  08  1  O4I 

Instruction  

261.267  ^46 

251  240  010 

Fine  arts  

17  d6j.  C24 

17  AA&   I4O 

Worship  

CO7   I  7O 

C  *O  T  7O 

Commerce  and  industry  

C6,4QO,7O7 

1:6,276,271 

Labor,  etc  

12  C4O  OIO 

Posts  and  telegraphs  

2OO  O7O  08? 

267  42O,4IO 

Colonies  

TOO  477  77O 

TIO.4IC.IOO 

Agriculture  

A.Z.2IZ   146 

4  <J,  0^7.684 

Public  works  

229,134,470 

228,374,599 

Total  

3.  83.7..82^,7oc 

3.700.102.06? 

army  and  navy.  Even  if  there  is  no  danger  of  the  bankruptcy 
of  any  great  modern  nation,  the  thought  must  at  least  occur  to 
one  that  it  is  a  pity  that,  with  so  many  public  needs  unsatisfied, 
with  such  large  possibilities  in  the  way  of  improvement  of  educa- 
tion and  our  general  environment,  such  enormous  and  almost 
incomprehensible  aggregates  of  wealth  should  be  annually  ex- 
pended for  warlike  purposes. 

Development  of  Public  Expenditures  with  respect  to  Regu- 
larity and  Irregularity.  —  Public  expenditures  are  regular  and 
irregular,  or  ordinary  and  extraordinary,  with  respect  to  their 
occurrence.  Whether  the  expenditures  are  regular  or  not  depends 


PUBLIC   EXPENDITURES  571 

upon  the  nature  of  the  goods  and  services  for  which  they  are  in- 
curred. A  large  force  must  be  employed  in  the  army  and  navy 
and  civil  service;  and  regular  expenditures  must  be  made  for 
these  branches  of  the  public  service.  On  the  other  hand,  there 
are  great  monumental  works  like  the  construction  of  a  capitol 
for  which  the  expenditure  is  irregular  in  character.  War,  famine, 
and  pestilence  occasion  irregular  expenditures.  It  is  to  be  no- 
ticed, however,  that  in  any  scientific  arrangement  regular  expendi- 
tures increase  and  irregular  expenditures  decrease.  This  is  par- 
ticularly the  case  in  a  large  country,  and  especially  so  when  long 
periods  of  time  are  taken  into  account.  It  is  an  end  to  be  striven 
for  in  the  interest  of  orderly  finance.  In  India  there  is  a  regular 
famine  fund  to  make  provision  for  the  recurring  famines,  so  that 
even  expenditure  of  this  kind  takes  on  the  character  of  regularity. 
The  longer  the  period  of  time  and  the  larger  and  richer  the  coun- 
try, the  greater  the  possibilities  of  establishing  regularity,  inas- 
much as  chance  elements  decrease  under  these  circumstances. 
The  construction  of  a  post  office  building  in  one  city  is  an  unusual 
event,  but,  when  the  United  States  as  a  whole  is  taken  into  account, 
it  is  quite  possible  to  provide  regularly  for  post  office  buildings. 

It  is  further  to  be  noticed  that  preventive  measures  rather  than 
relief  measures  increase  regular  expenditures.  This  is  one  argu- 
ment in  favor  of  constant  preparation  for  war.  The  war  expendi- 
tures are  smaller  and  less  disturbing  when  they  come.  It  need 
not  be  remarked  that  this  financial  advantage  may  be  secured  at 
a  loss  otherwise.  Furthermore,  there  is  a  certain  conflict  of 
interests  between  administration  and  legislation.  Those  who  are 
administratively  responsible  for  expenditures  prefer  to  have  budg- 
ets voted  for  long  periods,  as  in  this  way  they  can  accomplish 
most  with  a  given  sum.  On  the  other  hand,  a  legislative  branch 
of  government  desires  that  budgets  should  be  voted  for  short 
periods  for  the  sake  of  stricter  control. 

It  is  also  to  be  noticed  that  the  constitutional  provisions  against 
debts  in  the  states  of  the  American  Union  promote  regular  expendi- 
tures. Where  loans  are  not  possible,  it  is  frequently  necessary  to 
spread  expenditures  over  long  periods  in  order  that  the  burden 
may  not  be  too  great  at  any  one  time.  It  is  in  this  way  that  in  the 


572  OUTLINES  OF  ECONOMICS 

state  of  Wisconsin,  for  example,  the  Historical  Library  Building 
was  built;  and  many  of  the  buildings  of  the  State  University  have 
been  constructed  under  like  conditions.  It  is  in  this  way  that  the 
new  Capitol  is  being  built.  Certain  sums  are  appropriated  each 
year  for  a  series  of  years.1 

Terms  used  in  Public  Expenditures.  —  The  terminology  of  public  finance, 
and  in  particular  of  public  expenditures,  has  occupied  a  great  deal  of  attention 
on  the  part  of  economists,  and  receives  elaborate  treatment  in  the  Census 
Report,  1907,  on  Wealth,  Debt,  and  Taxation.  It  is  here  possible  to  point  out 
simply  a  few  distinctions  and  to  define  a  very  few  terms;  but  in  a  more 
elaborate  and  technical  treatise  on  public  finance  it  would  be  necessary  to 
give  a  great  deal  of  attention  to  this  topic. 

Instead  of  the  term  "  public  expenditures,"  we  sometimes  have  the  term 
"financial  needs."  This  is  employed  particularly  by  German  writers, 
who,  however,  employ  it  interchangeably  with  expenditures.  The  two  terms 
represent  two  approaches  to  the  same  subject.  Educational  needs,  treated 
from  the  financial  standpoint,  become  expenditures  for  education.  "Ex- 
penditures" seems  to  be  the  more  natural  term. 

We  must  distinguish  between  expenditures  in  the  narrow  sense  and  invest- 
ments. In  the  broad,  general  sense,  all  governmental  outlays  would  be 
designated  as  expenditures.  In  a  narrow  sense  we  use  "expenditures" 
for  those  outlays  which  are  not  expected  to  yield  a  direct,  material  return, 
and  "investments"  for  those  outlays  which  are  expected  to  yield  such  a 
return.  An  investment  would  mean  an  outlay  of  capital  rendering  a  direct 
income  equal  to  current  interest.  If  the  return  is  less  than  current  interest, 
it  partakes  of  the  nature  of  expenditures  in  the  narrow  sense  of  the  term. 
Money  expended  in  improving  and  extending  the  state  railways  of  Germany, 
for  example,  would  be  regarded  as  investment.  Money  expended  on  the 
streets  of  cities  are  expenditures.  This  distinction  is  one  of  increasing  sig- 
nificance because  governments  are  extending  their  functions  in  the  industrial 
field.  In  all  sound  public  financiering,  especially  in  all  action  concerning 
public  debts,  the  distinction  must  be  made  between  an  outlay  of  capital  which 
will  yield  a  return  at  least  equal  to  the  current  rate  of  interest  and  those  out- 
lays which  yield  their  return  in  direct  and  immediate  satisfactions,  but  do  not 
make  any  direct  and  immediate  provision  for  interest  payments  and  final 
amortization. 

1  The  authors  hope  by  taking  concrete  illustrations  from  their  own  environment 
that  they  will  accomplish  two  purposes:  (i)  that  the  text  will  be  rendered  more 
real  and  less  abstract,  and  (2)  that  their  readers  will  be  encouraged  to  seek  illustra- 
tions from  their  environment.  One  aim  which  is  constantly  kept  in  mind  is  the 
importance  of  cultivating  the  power  of  observing  and  reflecting  upon  economic 
phenomena. 


PUBLIC   EXPENDITURES  573 

It  is  generally  conceded  that  narrow  debt  limits  should  not  be  applied  in 
the  case  of  cities  to  investments. 

The  census  volume  just  referred  to  makes  a  further  distinction  between 
investments  and  outlays  as  follows:  "Under  investments  are  included  all 
transactions  of  national,  state,  and  municipal  governments  connected  with 
the  purchase,  sale,  or  possession  of  real  property  or  securities  held  exclusively 
for  investment  purposes,  and  the  loan  of  public  money  to  individuals,  cor- 
porations, or  other  civil  divisions.  Such  transactions  are  of  two  classes : 
first,  those  of  the  sinking,  investment,  and  public  trust  funds  in  which  or 
through  which  the  nation,  state,  or  municipality  invests  money  for  the  sole 
purpose  of  deriving  interest,  rent,  or  other  income  therefrom;  second,  the 
transactions  of  a  more  temporary  character  by  which  the  national,  state,  or 
municipal  government  receives  interest  on  current  cash  deposits  and  on 
deferred  payments  of  taxes  and  special  assessments."  * 

"Outlays  —  'Outlays'  are  the  costs,  paid  or  payable,  incurred  by  nations, 
states,  and  municipalities  in  the  purchase  of  lands,  in  the  purchase  or  con- 
struction of  buildings  and  other  structures,  and  in  the  equipment,  improve- 
ment, and  additions  to  public  works  which  are  more  or  less  permanent 
in  character,  and  which  are  used  by  the  nations,  states,  and  municipalities 
in  the  exercise  of  their  general  functions  or  in  connection  with  the  business 
undertakings  conducted  by  them.  Governmental  outlays  partake  of  the  na- 
ture both  of  commercial  expenses  and  of  commercial  capital  outlays.  Like 
commercial  outlays,  they  are  to  secure  more  or  less  permanent  acquisitions; 
but  unlike  them,  they  do  not  secure  property  applicable  under  any  ordinary 
condition  for  meeting  liabilities.  Further,  they  are  always  a  legal  charge 
against  revenue,  while  capital  expenditures  in  commercial  undertakings 
are  always  recorded  in  the  accounts  with  capital."  J 

A  further  important  distinction  is  that  between  expenditures  for  works  of 
a  permanent  character  and  those  of  a  more  temporary  character.  The  prod- 
ucts of  expenditures  of  a  permanent  character  are  those  which  keep  on 
yielding  utilities  indefinitely  —  a  public  park,  for  example.  The  expenditure 
for  utilities  of  a  temporary  character  are  those  which  must  be  perpetually 
renewed,  like  an  annual  expenditure  for  the  maintenance  of  public  parks. 
This  is  a  distinction  which  must  always  be  observed  in  sound  public  finance. 

Classification  of  Public  Expenditures.  —  Many  principles  of  classification 
have  been  adopted.  An  important  one  is  that  made  with  respect  to  political 
units:  — 

I.    Central. 
II.   Intermediate. 
III.   Local  units. 

This  classification  can  be  extended  indefinitely,  but  it  gives  us  the  three 
main  classes  of  units.  In  our  country  the  central  would  be  the  federal,  the 
intermediate  would  be  the  separate  states,  and  the  others,  the  local.  An 

1  P-  956-  *  P-  954- 


574  OUTLINES   OF  ECONOMICS 

examination  of  expenditures  with  respect  to  these  units  throws  a  good  deal 
of  light  upon  our  general  political  evolution.  It  especially  helps  us  to  de- 
termine whether  or  not  there  is  a  tendency  in  the  direction  of  centralization, 
although  expenditures  alone  are  not  conclusive.  Sometimes  fear  has  been 
expressed  lest  the  central  governments  should  expand  at  the  expense  of  the 
local  governments.  It  is  thought  by  some  that  we  are  living  in  a  period  of 
centralization.  The  statistics  of  public  expenditures  do  not  bear  this  out, 
as  local  expenditures  seem  to  be  increasing  more  rapidly  than  those  of  central 
governments.  There  may  be  some  ground  to  apprehend  that  in  the  United 
States  the  cities  and  federal  government  are  increasing  in  importance  more 
rapidly  than  our  commonwealths.  The  states  which  make  up  the  Union 
have  lost  somewhat  in  relative  significance,  if  we  may  judge  from  the  com- 
parison of  public  expenditures  of  the  various  political  units.1  There  appears 
to^be,  however,jsome  ground  for  thinking  that  the  states  are  again  becoming 
of  greater  importance  in  our  general  structure  of  government.  We  find, 
for  example,  that  the  expenditures  of  the  state  of  New  York  have  increased 
from  not  quite  $10,000,000  in  1881  to  nearly  $22,000,000  in  1902.  This  is 
a  budget  which  would  seem  to  indicate  activity,  although,  to  be  sure,  far  less 
than  the  budget  of  New  York  City.  Our  Western  states  are  developing 
remarkable  educational  systems,  reaching  from  the  common  school  to  the 
university,  and  some  of  our  states  are  developing  forest  property,  and  a 
•  department  of  forestry.  These  are,  perhaps,  ample  illustrations  of  the 
growing  significance  of  the  state.  But  we  must  await  future  developments 
in  order  to  ascertain  the  extent  of  the  movement. 

The  following  is  a  very  simple  classification  made  with  respect  to  objects 
for  expenditure :  — 

I.   Expenditures  for  security. 
II.   Expenditures  for  the  poor  and  unfortunate. 
III.    Expenditures  for  education. 
IV.  Expenditures  for  commerce,  diplomacy,  and  government. 

The  following  is  a  more  extensive  classification : 3  — 
I.  Head  of  the  state. 
II.   Legislative  bodies. 

III.  Public  administration,  including  central  departments. 

IV.  Army  and  navy. 

I.   Head  of  the  state  —  emperor,   kings,   grand  dukes,   etc.,    Germany. 
Presidents  and  governors  —  representing  the  sovereignty  of  the  state. 

1  It  must  again  be  emphasized  that  expenditures  alone  are  not  sufficient  evidence 
to  enable  us  to  speak  positively  on  this  point.  In  general,  however,  there  is  a 
correspondence  between  the  amount  of  public  money  expended  by  a  political 
unit  and  its  social  significance. 

'This  is  taken  largely  from  Cossa's  Taxation:  Its  Principles  and  Methods, 
Part  II,  Chap.  Ill,  Classification  of  Public  Expenditures. 


PUBLIC   EXPENDITURES  575 

II.   Legislative   bodies  —  Congress,   legislatures,    county   boards,   county 

councils,  municipal  councils. 
III.   Public  administration  —  central,  intermediate,  local. 

A.  Financial  administration. 

1.  Treasury. 

2.  Public  domain  —  (regalia)  —  fiscal  monopolies,  public  business. 

Further  subdivision  possible. 

3.  Administration  (especially  collection)  of  taxes. 

4.  Public  debts.     (Sinking  funds,  etc.) 

B.  Administration  of  foreign  affairs  —  diplomacy,  consulates,  etc. 

C.  Administration  of  the  interior. 

1.  Internal  security. 
Courts. 

U.S.  marshals. 

Constables. 

Police,  etc. 

Repression  and  prevention. 

2.  The  administration  designed  to  promote  general  public  welfare. 

a.  Intellectual  and  moral  welfare. 

Education  in  its  various  phases.     Statistical  bureaus,  etc. 

b.  Physical  welfare. 

(a)  General    economic    well-being:    economic    welfare    in 

general  —  the    promotion   of    manufactures,    agricul- 
ture, and  commerce.     Weather  bureau. 

(b)  Life  saving  in  general.      Public  health.     Sanitary  ad- 

ministration. 

(c)  Charitable  and  provident  institutions. 

(d)  Public  works,  including  model  institutions,  etc.,  such  as 

farms. 
(c)  The  promotion  of  the  interests  of  labor.     Here  there  is 

overlapping,  for  the  labor  bureau  is  educational  also. 
(/)  Pleasure,  recreation,  and  miscellaneous. 

IV.   Army  and  navy. 

Regular  army  and  navy  militia. 

The  student,  and  even  the  general  reader,  will  find  it  especially  instructive 
to  study  the  financial  reports  of  the  federal  government  and  of  our  states  and 
cities,  and  arrange  the  items  of  expenditures  under  these  various  heads. 
If  access  can  be  had  to  reports  covering  a  considerable  number  of  years  and 
different  countries,  it  will  be  found  that  an  examination  of  them  will  throw  an 
immense  amount  of  light  upon  the  nature  of  modern  civilization  and  its 
direction. 

It  is  also  instructive  to  compare  expenditures  on  account  of  the  head  of  the 
state  in  various  countries,  and  particularly  to  contrast  monarchical  and 


576  OUTLINES   OF  ECONOMICS 

republican  countries.  It  is  important  to  discover  great  historical  tendencies, 
and  to  contrast  different  periods  of  time,  especially  as  regards  monarchical 
expenditures.  It  is  beyond  all  question  that  relatively,  in  the  civilized  world, 
this  is  an  item  of  declining  importance.  At  the  present  time,  the  king  of  a 
great  country  like  Prussia  or  England  supports  a  magnificence  of  state  which 
is  altogether  out  of  keeping  with  the  ideas  of  a  democracy  or  a  republic. 
Four  or  five  millions  of  dollars  per  annum  for  a  modern  monarch  is  not  a 
large  expenditure.  On  the  other  hand,  in  contrast,  the  expenditures  of  the 
President  of  the  United  States  (including  those  connected  with  the  executive 
mansion,  contingent  expenses  of  all  sorts,  and  presidential  clerks)  amount 
roughly  to  $150,000.  However,  as  regards  the  expenditures  of  a  modern 
monarch  (like  the  German  Emperor  William  II),  a  detailed  examination 
shows  that  custom  and  tradition,  as  well  as  the  will  of  the  monarch,  cause 
a  large  part  of  his  income  to  go  for  public  purposes,  and  that  his  wealth  has 
been  largely  socialized.  The  king  is  no  longer  the  typical  rich  man. 

On  the  other  hand,  the  expenditures  on  account  of  the  American  Congress 
are  unprecedented  in  amount  among  the  expenditures  incurred  on  account 
of  legislative  bodies.  The  world  has  never  seen  anything  of  the  kind  be- 
fore, and  nothing  parallel  to  it  can  be  found  in  any  other  country.  Among 
other  things,  this  goes  to  indicate,  as  contrasted  with  Germany,  the  great 
importance  of  the  legislative  body  which  is  supposed  to  represent  the  people 
directly  and  immediately  and  to  carry  out  their  will.  In  aristocratic  countries 
the  legislative  office  is  sometimes  an  unpaid  office.  This  is  the  case  in 
British  and  German  parliaments,  the  idea  being  to  favor  wealth  and  to 
counteract  democratic  tendencies  —  an  aim  not  accomplished  at  present. 
A  democracy,  however,  is  more  likely  to  insist  upon  a  legislative  office  being 
a  paid  office ;  and,  in  some  of  the  German  states,  although  the  payment  is 
small,  its  acceptance  is  compulsory  for  the  members  of  the  legislative 
bodies. 

Expenditures  incurred  in  the  administration  of  foreign  affairs  are  of  in- 
creasing importance  on  account  of  growing  economic  internationalism.  We 
would  here  have  two  main  classes;  namely,  expenditures  on  account  of 
diplomacy,  those  representing  the  purely  political  side  of  government,  and 
expenditures  on  account  of  the  consular  service,  representing  the  business 
interests  of  the  country.  Boundaries  and  surveys  are  expenses  which  would 
come  under  this  general  heading. 

With  regard  to  the  administration  of  foreign  affairs,  any  one  nation  is 
limited  in  what  it  can  do  by  international  customs.  We  Americans,  for 
example,  cannot  force  our  ideas  on  other  nations.  Certain  standards  of 
dignity  and  propriety  have  been  established  with  respect  to  the  mode  of  life 
for  diplomats,  and,  if  we  depart  from  these,  we  do  so  at  a  loss  which  every 
diplomat  in  the  service  of  the  United  States  keenly  feels.  The  most  that  we 
can  do  is  to  exercise  pressure  in  what  we  believe  to  be  the  right  direction,  and 
that  is  the  direction  of  democratic  simplicity. 


PUBLIC   EXPENDITURES  577 

When  we  examine  expenses  incurred  in  the  administration  of  justice,  we 
notice  a  large  increase  with  the  growth  of  democracy.  In  earlier  times  in 
countries  like  England  and  Germany,  the  administration  of  justice  was  to  a 
greater  or  less  extent  "patrimonial,"  being  connected  with  certain  estates. 
The  duty  of  administering  justice  went  with  the  great  estate  or  manor  and 
involved  little  expense.  As  people  take  things  into  their  own  hands  they 
must  pay  their  own  expenses.  Democracy,  in  its  progress,  means  large 
public  expenditures. 

The  new  humanitarianism  of  the  age,  which,  in  a  way,  is  one  expression  of 
democracy,  involves  large  expenditures,  as  seen  in  education,  modern  re- 
formatories, etc.  But  it  is  believed  by  the  advocates  of  humanitarianism  and 
democracy  that  these  expenditures  are  worth  while. 

It  is  when  we  come  to  expenses  incurred  in  the  promotion  of  the  general 
welfare  that  we  see  the  most  remarkable  and  edifying  phenomena  that  greet 
us  in  the  treatment  of  public  expenditures.  This  has  been  seen  in  the 
data  already  given,  and  will  become  increasingly  manifest  as  the  student  car- 
ries on  his  statistical  studies  in  this  field.1 

QUESTIONS  AND  EXERCISES 

1.  Define  public  finance.     Why  should  it  be  regarded  as  a  part  of  eco- 
nomics?    Can  you  give  any  reasons  why  it  should  be  regarded  as  a  sepa- 
rate science  ? 

2.  Can  we  spare  money  for  taxes  only  when  we  have  an  income  affording 
a  surplus  over  and  above  necessities  ?     If  the  money  paid  for  taxes  is  used  to 
provide  us  with  necessities,  is  there  any  good  ground  for  the  doctrine  that  an 
income  sufficient  to  afford  a  minimum  of  subsistence  should  be  exempted 
from  taxation  in  the  case  of  an  income  tax  ? 

3.  What  various  meanings  do  you  ascribe  to  the  enormous  increase  in 
public  expenditures  during  the  nineteenth  century  ? 

4.  What  would  be  the  consequences  if   the  government  of  the  state  in 
which  you  live  should  strive  for  the  largest  possible  amount  of  revenue,  and 
then  govern  its  expenditures  so  as  to  consume  the  entire  state  income  ? 

5.  Discuss  the  differences  between  public  expenditures  and  the  expendi- 
tures of  a  private  household.     Would  you  regard  it  wise  on  your  part  to 
make  any  expenditures  with  the  idea  that  a  benefit  to  some  one  would  accrue 
one  hundred  years  later  ?  fifty  years  later  ?  twenty  years  later  ? 

6.  What  considerations  must  govern  us  when  we  attempt  to  answer  the 
question,  "  What  is  the  proper  proportion  between  public  expenditures  and 
the  total  income  of  society?" 

7.  Discuss  Wagner's  rule.      Is  the  fact  that  public  ownership  increases 
the  permissible  proportion  of  social  income  that  may  be  used  for  public 

1  For  statistical  matter  bearing  upon  the  subject-matter  of  this  chapter,  see 
Appendix  A. 

2P 


578  OUTLINES   OF   ECONOMICS 

purposes  an  argument  for  public  ownership  of  railways  ?    If  so,  why  ?    If  not, 
why  not  ? 

8.  Discuss  Wagner's  law  of  increasing  public  expenditures  and  show  its 
significance. 

9.  Discuss  economy,  parsimony,  frugality,  extravagance  in  public  ex- 
penditures, and  give  as  full  illustrations  of  each  as  you  are  able  (a)  from  your 
own  observation,  (6)  from  your  reading  and  conversation  and  correspondence 
with  others,  public  officials  included.     Make  this  the  subject  of  a  topic  for  a 
class  report. 

10.  Discuss  the  historical  order  in  which  items  of  expenditure  appear  in 
national,  state,  and  local  governments.     Give  illustrations  from  the  state  and 
from  the  local  political  unit  in  which  you  live.     Give  any  illustration  which 
may  occur  to  you  of  taxation  which  lightens  the  burdens  of  the  taxpayer. 
Does  it  afford  you  satisfaction  when  you  buy  postage  stamps  to  know  that  the 
money  paid  flows  into  the  public  treasury,  and  not  into  the  treasury  of  a 
private  corporation? 

11.  If  you  were  permanent  Secetary  of  War,  would  you  desire  to  know  for 
a  long  number  of  years  in  advance  the  yearly  sums  that  could  be  expended 
on  the  army  ?     Could  you  thus  make  the  same  amount  of  money  accomplish 
more  than  if  dependent  upon  annual  grants  uncertain  in  amount?     What 
would  be  your  view  as  a  member  of  Congress?     Is  a  state  university  to  be 
controlled  in  its  expenditures  by  the  legislature  as  rigidly  as  Congress  should 
control  the  administration  of  the  army?     If  so,  why?     If  not,  why  not? 
Would  you  make  any  distinction  in  this  respect  between  the  army  and  the 
navy? 

12.  Point  out  the  different  kinds  of  public  expenditures  and  distinctions 
between  expenditures  and  investments,   and  show  their  significance.     If 
public  parks,  like  publicly  owned  railways,  yield  permanently  services  to 
society,  why  should  different  rules  of  financiering  apply  to  them  ? 

13.  Present  such  statistics  as  you  may  be  able  to  gather  showing  relatively 
and  for  as  long  a  time  as  possible  the  increases  in  public  expenditures  in  the 
federal  government,  in  your  own  state,  and  in  your  own  local  political  unit 
(city,  county,  town,  etc.),  and  give  all  the  evidence  that  you  can  secure  showing 
the  significance  of  the  movement. 

14.  Show  the  various  ways  in  which  the  increasing  degree  of  self-govern- 
ment and  the  growing  altruism  of  the  age  bring  about  an  expansion  of  public 
expenditures.     Is  it  worth  while? 

REFERENCES 

Government  publications  generally. 

As  illustrative  particularly  of  the  expansion  of  government  expenditures  and 

public  work,  the  Year  Book  of  the  Department  of  Agriculture. 
For  growth  of  militarism,  take  publications  of  the  Department  of  War  and 

publications  of  similar  departments  in  other  countries. 


PUBLIC   EXPENDITURES  579 

For  general  statistical  data,  Martin's  Statesman's  Year  Book  is  as  reliable  as 
anything  in  English.  For  our  own  country,  see  Finance  Reports  of  the 
Secretary  of  the  Treasury  and  census  volumes,  especially  the  volume  on 
Wealth,  Debt,  and  Taxation.  For  making  a  broad  survey  of  the  federal 
expenditures  of  the  United  States,  perhaps  no  single  publication  is  more 
useful  than  the  annual  "  Letter  from  the  Secretary  of  the  Treasury  trans- 
mitting estimates  of  appropriations." 


CHAPTER    XXXIII 

PUBLIC  REVENUES  FROM  LOANS  AND  GOVERNMENT 
OWNERSHIP 

Classification.  —  Having  decided  what  expenditures  it  is  pos- 
sible or  desirable  to  make,  the  question  next  arises  how  the  neces- 
sary revenues  may  be  raised.  Differing  classifications  of  public 
revenue  have  been  almost  as  numerous  as  the  writers  who  have 
made  them.  Without  entering  into  a  discussion  of  the  reason  for 
such  differences,  we  may  present  at  once  a  classification  which  is 
in  general  harmony  with  the  usual  treatment  of  the  subject.  It 
should  be  distinctly  understood  that  the  figures  accompanying  the 
classification  are  only  approximately  correct,  as  it  is  still  impossible 
to  fit  public  accounts,  particularly  those  of  the  national  govern- 
ment, to  that  classification  which  long  study  has  shown  to  be  most 
serviceable  to  the  economic  student. 

The  figures  in  Table  I  are  derived  from  the  Census  Report  entitled 
Wealth,  Debt,  and  Taxation  (Part  II,  Table  2,  and  Part  IV,  Tables  2, 
12,  13,  14,  15,  18),  and  from  Census  Bulletins  20,  45,  and  50.  The  figures 
refer,  for  the  most  part,  to  the  fiscal  year  ending  June  30,  1903,  but  this  is 
not  true  in  all  cases.  In  addition  to  the  "receipts  from  revenues,"  as  defined 
by  the  Census  Bureau  (Wealth,  Debt,  and  Taxation,  Part  IV,  Table  i), 
Table  I  includes  $119,722,845  for  public  debt  and  $11,391,791  for  revenue 
from  public  domains,  not  included  in  the  census  totals.  The  $119,722,845 
represents  the  increase  of  public  debt  in  one  year,  i.e.  the  difference  between 
the  receipts  on  account  of  the  public  debt  and  the  payments  on  the  same 
account,  but  it  takes  no  cognizance  of  the  increase  of  cash  and  other  assets 
available  for  the  payment  of  the  debt.  In  arriving  at  the  total,  $4,000,000 
has  been  allowed  for  the  increase  in  the  debt  of  the  minor  civil  divisions 
other  than  counties  and  cities  having  more  than  eight  thousand  inhabitants. 
The  $11,391,791  represents  an  estimate  of  the  receipts  from  the  sale  of 
public  lands  by  the  national  and  state  governments.  This  item  is  classed 
by  the  census  statisticians  with  the  nominal,  or,  in  their  designation,  the 
"temporary  "  receipts,  on  the  ground  that  when  real  estate  is  sold,  the  revenue 
is  offset  by  a  corresponding  decrease  in  the  capital  assets  or  the  aggregate 


PUBLIC   REVENUES 


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582  OUTLINES   OF  ECONOMICS 

value  of  the  fixed  possessions  of  the  government.  The  justice  of  this  treat- 
ment is  plain  in  the  case  of  municipal  buildings  and  other  real  estate  forming 
part  of  the  fixed  plant  of  the  municipality,  but  it  is  not  so  clear  in  the  case  of 
the  public  lands  of  the  state  and  national  governments  which  for  the  most 
part  yield  no  revenue  and  resemble  the  merchandise  or  stock  rather  than  the 
capital  or  plant  of  the  private  business.  In  the  figures  given  in  the  table, 
ineradicable  duplications  to  the  amount  of  about  $70,000,000  occur,  although 
most  of  the  common  duplications  such  as  transfers  and  refunding  operations 
generally  have  been  eliminated  by  the  excellent  classification  employed  in 
the  Census  Report.  It  should  be  added,  also,  that  in  practice  it  is  im- 
possible to  differentiate  clearly  among  taxes,  fees,  revenues  from  public 
domains,  and  revenues  from  public  industries,  and  that  the  assignment  of 
the  detailed  items  to  these  classes  is  in  some  cases  quite  arbitrary. 

Temporary  Revenues  and  Public  Debts. — The  modern  State 
follows  a  policy  of  deficit  financiering.  The  great  and  increasing 
expenditures,  which  have  been  described  in  the  preceding  chapter, 
entail  burdens  too  heavy  to  be  borne,  at  least  in  the  first  instance, 
by  taxation  alone,  and  recourse  must  constantly  be  had  to  the 
public  credit.  One  year  with  another,  about  one  fourth  of  the 
annual  revenue  of  England  is  used  in  the  payment  of  debt  or 
interest  upon  debt;  and  as  was  shown  in  the  French  budgets  for 
1906  and  1907,  given  on  page  570,  almost  one  third  of  the  total 
expenditures  of  France  is  devoted  to  the  same  purpose. 

In  the  last  half  of  the  nineteenth  century,  the  aggregate  public 
debt  of  the  civilized  world  increased  enormously.  According  to 
the  best  estimates,  the  indebtedness  of  the  national  governments  of 
the  world,  which  amounted  to  $7,627,692,215  in  1848,  had  risen 
to  $27,524,976,915  in  1890,  and  since  that  time  it  has  probably 
increased.  Figures  showing  the  total  and  per  capita  debt  of  all 
governmental  divisions  of  this  country  are  given  in  Table  II. 
From  this  statement  it  appears  that  between  1890  and  1902  the 
aggregate  public  debt  of  this  country  increased  over  $800,000,000, 
the  greater  part  of  the  increase  being  ascribable  to  the  astonish- 
ing growth  of  municipal  and  local  indebtedness,  which  increased 
nearly  90  per  cent  in  the  interval.  It  is  true  that  the  total 
public  debt  has  diminished  since  1880,  that  the  per  capita  debt 
has  fallen  from  $82.99  m  ^7°  to  $35-5°  m  1902,  and  that  accord- 
ing to  Census  estimates  of  national  wealth  (not  very  trustworthy), 
the  public  debt  covered  only  $2.85  of  each  one  hundred  dollars  of 


PUBLIC    REVENUES 


583 


national  wealth  in  1902,  as  against  $3.06  in  1890,  $6.97  in  1880, 
and  $10.64  in  1870.  But  this  diminution  of  the  aggregate  debt 
is  due  to  the  extraordinary  progress  which  our  tariff  surpluses  have 
enabled  us  to  make  in  reducing  the  debt  contracted  during  the 
Civil  War;  and  the  normal  movement  in  the  long  run  is  probably 
toward  an  increase  of  the  public  debt,  at  least  absolutely  and  per 
capita,  if  not  in  proportion  to  the  national  wealth.1 

TABLE  II 

PUBLIC  DEBT  OF  THE  UNITED  STATES 
Net  Debt  Outstanding 


TOTAL  IN  MILLIONS  OF  DOLLARS 

PER  CAPITA 

1902 

1890 

1880 

1870 

1902 

1890 

1880 

1870 

Total  

$2790 
925 

235 
197 

1387 
46 

$1989 
852 

211 

MS 

744 
37 

$3°43 
1919 

275 
124 

707  1 
i8f 

$3200 
233  * 

353 
188 

328 

$35  -5° 
11.77 

2.99 
2.50 

17-65 
o-59 

$31.76 
13.60 

3-37 
2.32 

11.88 
o-59 

$60.66 
38-27 

5-48 
2-47 

14.09! 
o-35  J 

$82.99 
60.46 

9-i5 
4-87 

8.51 

National  gov't.  . 
States  and  terri- 
tories   

Counties  

Cities,    villages, 
etc  

School  districts  . 

The  great  increase  of  public  debts  is  due  principally  to  two  causes, 
wars  and  public  works.  The  former  are  misfortunes,  losses,  how- 
ever the  result  is  expressed.  The  loss  comes,  not  in  contracting  a 
debt,  but  in  spending  and  destroying  the  property  consumed  by 
war.  This  loss  cannot  be  postponed  by  a  debt.  It  comes  out  of 
wealth  existing  at  the  time,  no  matter  what  arrangement  is  made. 
In  former  times  each  man  bore  the  loss  as  it  happened  to  fall  on 
him.  The  modern  method  differs  in  just  this,  that  the  loss  is 
transferred  to  the  whole  public.  This,  again,  may  be  done  in  two 
ways.  A  tax  may  be  levied  at  the  time  sufficient  to  pay  all 

1  According  to  Census  estimates,  the  per  capita  debt  of  the  United  Kingdom 
in  1904-1905  was  3.93,  that  of  France  4.86,  and  that  of  Italy  2.25  times  as  great 
as  the  per  capita  debt  of  the  United  States  in  1902,  while  that  of  Sweden  was  a 
trifle  less  than  the  per  capita  debt  of  the  United  States. 


584  OUTLINES    OF   ECONOMICS 

expenses,  or  a  debt  may  be  incurred  and  the  necessary  taxation 
spread  over  a  longer  period  of  time.  In  practice  the  latter  proves 
far  the  best,  for  at  least  a  part  of  the  expenses.  It  gives  capital 
time  to  adjust  itself  to  the  extraordinary  demands.  A  war  debt 
is,  therefore,  not  a  misfortune,  though  it  stands  for  a  previous 
misfortune  —  war. 

The  case  is  clearer  when  we  consider  debts  contracted  for  public 
works.  Under  this  head  we  include  primarily  productive  enter- 
prises like  railways,  canals,  forests,  gas  works.  These,  when  pur- 
chased or  constructed  by  the  government,  are  the  occasion  of 
debts,  sometimes  enormous  in  amount.  It  might  seem  possible 
to  pay  for  them  by  immediate  and  heavy  taxation,  since  no  more 
is  taken  out  of  the  people  than  when  the  money  is  borrowed.  But 
the  national  wealth  is  not  like  an  ocean,  alike  in  all  its  parts  and 
instantly  filling  up  where  water  is  dipped  out.  It  makes  all  the 
difference  in  the  world  where  you  dip.  Here  are  men  who  have 
capital  invested  in  a  productive  business;  here  are  others  who  have 
capital  lying  idle.  The  State  decides  to  make  a  public  investment, 
and  calls  for  capital.  If  it  collects  it  by  an  immediate  and  heavy 
tax,  the  first  class  have  a  part  of  their  employed  capital  withdrawn, 
and  their  business  is  crippled  or  ruined.  The  others  have  some 
of  their  capital  withdrawn,  but  the  most  still  lies  idle.  The  best 
that  can  be  done  in  such  a  case  is  for  the  first  class  to  borrow  of 
the  second,  which  only  makes  private  debts  instead  of  public  ones 
—  a  much  more  burdensome  condition  of  things  for  the  national 
industry.  The  wiser  modern  method  is  for  the  State  to  borrow 
the  unemployed  capital  and  leave  the  employed  capital  intact, 
then  imposing  a  moderate  tax  which  can  be  paid  out  of  annual 
income.  If  the  expenditure  in  question  is  an  investment,  it  pre- 
sumably pays  for  itself  in  time  without  requiring  taxation. 

This  brings  us  to  the  relation  between  taxes  and  debts.  Taxes 
should  never  be  so  heavy  that  they  cannot  be  paid  easily  out  of 
annual  income.  If  they  trench  upon  national  capital,  they  derange 
private  industries  disastrously  because  they  are  imposed  upon  all 
without  regard  to  the  nature  of  their  investments.  But  while 
taxes  cannot  safely  exceed  the  national  disposable  surplus  for  each 
year,  it  does  not  follow  that  the  State  may  not  take  capital  as  well 


PUBLIC   REVENUES  585 

as  surplus  for  its  undertakings;  only  this  capital  must  be  taken 
from  those  who  have  uninvested  capital.  This  cannot  be  done  by 
any  method  of  general  contribution  like  taxation.  It  can  only  be 
done  by  public  loans.  Whether  the  loan  is  a  wise  thing  or  not 
depends  altogether  on  the  nature  of  the  State's  investment.  If 
the  State  takes  this  capital  ever  so  wisely  and  wastes  it,  the  people 
have  lost  just  so  much  capital.  If,  on  the  other  hand,  the  State 
takes  capital  which  was  uninvested  and  therefore  unproductive, 
and  invests  it  in  a  profitable  undertaking,  the  net  result  to  society 
is  an  additional  profit.  Public  debts  are  no  indication  of  national 
poverty.  Whether  a  nation  is  growing  poorer  or  not  depends  not 
on  its  indebtedness,  but  on  its  productiveness  relatively  to  its  ex- 
penditures. Public  debts  are  not  a  good  thing  in  and  of  them- 
selves, but  they  have  incidental  advantages  which  offset  some  of 
their  disadvantages. 

Having  noticed  the  natural  limits  of  both  taxation  and  borrow- 
ing, we  have  now  to  ask,  What  kind  of  expenditures  should  be  pro- 
vided for  by  each  ?  In  general  the  answer  is  easy,  though  details 
are  troublesome  at  times.  Ordinary  expenditures,  that  is,  those 
which  recur  with  sufficient  regularity  so  that  they  can  be  foreseen 
and  estimated  in  advance,  if  not  provided  for  by  receipts  from 
domains  and  industries,  must  be  met  by  taxation.  If  the  State 
cannot  do  this,  it  is  a  confession  that  ordinary  expenditures  are  in 
excess  of  the  disposable  income  surplus  of  the  nation,  a  state  of 
things  which  means  bankruptcy  if  continued  long  enough. 

Extraordinary  expenditures,  such  as  national  misfortunes  — 
war,  flood,  etc.,  —  and  public  investments,  —  railways,  city  gas 
works,  etc.,  —  should  be  met  by  loans.  The  function  of  loans 
thus  becomes  a  double  one:  (i)  the  distribution  of  unavoidable 
losses,  so  that  industry  is  as  little  disturbed  as  possible;  and  (2)  the 
investment  of  national  uninvested  capital  in  productive  public 
enterprises. 

There  is  a  tendency,  springing  out  of  fright  partly  premature,  to  place 
undue  constitutional  restrictions  upon  the  power  to  create  debts.  This 
tendency  ought  to  be  checked.  It  places  states  and  cities  at  a  disadvantage 
as  compared  with  private  corporations.  It  also  tends  to  throw  into  the  hands 
of  private  corporations  enterprises  which  cannot  be  paid  for  out  of  cue 


586  OUTLINES   OF  ECONOMICS 

year's  revenues,  and  yet  might  advantageously  be  acquired  by  the  public. 
At  the  present  time  excessive  limitations,  unworthy  of  a  free  people,  make 
it  impossible  for  some  cities  to  carry  out  necessary  public  improvements, 
although  these  improvements  would  not  impose  the  slightest  real  burden  upon 
the  taxpayers.  In  Chicago  recently,  to  take  one  of  many  examples  which 
might  be  cited,  after  a  prolonged  and  exceedingly  expensive  campaign  for 
the  improvement  of  the  street-car  service,  the  city  was  prevented  from  carry- 
ing out  a  carefully  devised  plan  of  reform  by  a  court  decision  which  held 
that  an  issue  of  street  railway  certificates  increased  the  indebtedness  of  the 
city  beyond  the  limitations  prescribed  by  the  constitution.  Provision  should 
be  made  for  the  extinction  of  all  debts  within  thirty-five  years,  or  say  forty 
as  a  maximum,  that  the  present  may  not  unduly  burden  the  future;  and 
especial  precaution  should  be  taken  against  hasty  action  in  incurring  in- 
debtedness. But  rigid  limitations  which  prevent  municipalities  from  off- 
setting part  of  their  debt  by  the  value  of  waterworks,  lighting  plants,  and 
other  assets  which  yield  a  monetary  return,  have  no  place  in  a  scientific  sys- 
tem of  public  finance. 

PERMANENT  REGULAR  REVENUES 

The  Public  Domain.  —  By  domains  we  usually  mean  agricul- 
tural and  mineral  land  and  forests  owned  by  the  State  and  man- 
aged in  the  interest  of  the  public  revenue,  although  we  might 
logically  subsume  under  the  term  the  streets  and  other  public 
property  of  cities,  with  all  those  valuable  franchises  and  privileges 
which  go  with  them.  As  appears  from  Table  I,  the  revenues  from 
this  source  constituted  less  than  i  per  cent  of  the  total  receipts 
in  1902,  and  if  the  corresponding  expenditures  were  shown,  the 
net  earnings  of  the  public  domain  would  appear  even  smaller, 
possibly  a  minus  quantity.  Taxation  is  the  great  source  of  public 
revenue  to-day. 

Until  a  comparatively  recent  date  this  was  not  the  case.  In 
early  feudal  times  the  king  had  large  estates  of  his  own  from  the 
produce  of  which  the  government  was  largely  supported,  and 
although  he  had  certain  military  rights  over  his  subjects,  he  had 
very  limited  rights  over  their  property.  Later,  the  king  became  a 
public  rather  than  a  private  person,  and  a  large  part  of  the  crown 
estate  became  the  property  of  the  public;  but  even  then  taxation 
was  relatively  unimportant,  and  the  State  relied  principally  in  times 
of  peace  upon  fines,  escheats,  fees,  crown  prerogatives,  —  or  certain 
dues  which  the  king  was  entitled  to  collect  as  of  his  own  right,  — 


PUBLIC   REVENUES  587 

and  upon  the  proceeds  of  the  public  domain.  Blackstone,  the 
great  English  jurist,  writing  in  1765,  classified  taxation  among 
the  "extraordinary"  revenues  of  the  sovereign;  and  in  some  of 
the  German  principalities  the  government  was  enabled  to  get  along 
without  taxation  in  times  of  peace,  down  to  the  close  of  the  eight- 
eenth century.  Real  democracy  not  yet  having  been  achieved, 
the  people  distrusted  taxation  and  resented  its  imposition,  while 
the  sovereign  wisely  clung  to  that  species  of  revenue  which  was 
independent  of  the  people's  caprice.  "  The  public  domains," 
said  Bodin,  the  great  political  philosopher  of  France  in  the  latter 
part  of  the  sixteenth  century,  "should  be  holy,  sacred,  and  in- 
alienable either  by  grant  or  by  prescription." 

But  as  democracy  developed  and  the  representatives  of  the 
people  gained  control  of  the  finances,  a  new  policy  was  everywhere 
adopted.  If  State  management  was  uneconomical  and  wasteful, 
and  if  the  government  could  obtain  all  the  revenue  needed  by  taxa- 
tion, why  preserve  the  wasteful  methods  of  management,  —  why 
not  turn  public  property  into  private  property,  to  be  developed  and 
multiplied  through  the  vitalizing  force  of  individual  self-interest? 
The  great  truth  was  realized  that  the  property  of  individuals  —  when 
su  bject  to  taxation  and  regulation  —  is  no  less  part  of  tlie  great  patri- 
mony of  the  State  than  those  lands  and  forests  whose  title  is  retained 
by  the  government  itself.  This  doctrine  was  generally  accepted  by 
the  greater  countries  of  the  world  during  the  eighteenth  century, 
so  that  Adam  Smith,  in  defending  it  in  1776,  was  able  to  write  that 
"there  is  not  at  present,  in  Europe,  any  civilized  state  of  any  kind 
which  derives  the  greater  part  of  its  public  revenue  from  the  rent  of 
lands  which  are  the  property  of  the  state.  ..."  This  philosophy 
was  dominant  when  our  national  goveri  ment  was  created  in  1 789, 
and  has  guided  our  national  policy  ever  since. 

Land  Policy  of  the  United  States.  —  By  exploration  and  occu- 
pancy, war,  and  various  cessions,  the  federal  government  has 
acquired,  since  the  Revolutionary  War,  a  magnificent  domain  of 
2,252,244  square  miles,  details  concerning  whose  disposition  may 
be  found  in  Table  III,  p.  589.  Now,  while  we  have  consistently 
followed  the  doctrine  of  alienation  until  very  recent  years,  trying, 
apparently,  to  get  rid  of  the  public  domain  as  rapidly  as  possible, 


588  OUTLINES    OF   ECONOMICS 

one  observes  historically  a  very  important  change  in  the  manner 
of  development.  In  the  early  years  of  the  Republic,  large  reve- 
nues were  expected  from  the  sale  of  public  lands;  it  was  the  finan- 
cial side  which,  according  to  Alexander  Hamilton,  claimed  ''pri- 
mary attention."  l  Until  about  1800,  the  policy  was  to  sell  the 
land  in  large  blocks,  even  though  it  went  to  speculators;  this  was 
followed  by  an  attempt  to  sell  small  holdings  to  actual  settlers, 
the  credit  system  being  used  with  disastrous  results;  later  (1830), 
the  preemption  policy  was  introduced  by  which  bona  fide  home 
makers  were  given  certain  advantages  in  purchase;  and  finally 
came  the  Homestead  Act  of  1862,  the  Timber  Culture  Act  of  1873 
(now  repealed),  and  the  other  less  important  laws  by  which  actual 
settlers  can  obtain  homes  practically  free  of  cost.  Our  original 
aim  was  to  develop  the  country  as  rapidly  as  possible,  and  secure 
as  much  revenue  as  possible  from  the  sale  of  public  lands.  We 
still  aim  to  develop  the  country,  but  the  idea  of  profit  has  been 
replaced  by  the  more  humanitarian  policy  of  giving  land  to  the 
landless.  To  exaggerate  the  evolution  of  policy  for  the  sake  of 
emphasis,  it  may  be  said  that  we  began  with  a  productive  policy, 
and  modified  it  with  a  distributive  policy;  that  in  the  beginning 
our  object  was  the  greatest  good,  while  now  it  is  the  greatest  good 
to  the  greatest  number,  or,  in  terms  more  appropriate  to  the  exact 
case  in  hand,  the  greatest  possible  use  of  the  public  domain  con- 
sistent with  widespread  participation  in  that  use. 

The  policy  of  national  development  regardless  of  immediate 
revenue  to  the  government  has  been  also  carried  out  by  enormous 
grants  of  lands  for  the  endowment  of  education  and  the  subsidiza- 
tion of  canal,  railway,  and  internal  improvement  companies.  Our 
public  lands  have  been  used  for  expenditure  rather  than  revenue, 
for  bounties  rather  than  profits.  Just  what  has  been  done  with 
the  public  domain  is  shown  in  Table  III,  which  should  be  care- 
fully studied.  On  the  mainland  of  the  United  States  we  still  (1007) 
have  left  nearly  one  hah5  as  much  land  as  we  have  disposed  of, 
unreserved,  and  still  unappropriated;  while  if  we  take  account  of 
Alaska  and  public  reservations,  the  government  might  yet,  as 
was  said  some  years  ago,  "repeat  its  sales  and  gratuities  acre  for 
1  Quoted  by  Donaldson  in  The  Public  Domain,  p.  198. 


PUBLIC   REVENUES 


589 


acre,  without  exhausting  its  reserves  of  land."  But,  of  course, 
the  best  of  the  lands  have  gone.  On  June  30,  1907,  there  still  were 
left  unappropriated  and  unreserved  774,438,420  acres,  although 
368,028,850  acres  of  this  area  were  situated  in  Alaska,  unsurveyed 
and  of  very  doubtful  value. 

TABLE   III 
DISPOSITION  OF  PUBLIC  DOMAIN:  JUNE  30,  1904 


DISPOSITION 


ACRES 


1.  Homestead  and  timber  culture  entries  —  final 106,240,464.25 

2.  Pending  homestead  entries — final  and  commuted  .  39,525,840.00 

3.  Private  land  claims  —  scrip  and  other 34,604,827.84 

4.  Allotment   to   individual   Indians,  and   half-breed 

scrip 14,408,079.86 

5.  School  and  agricultural  college  grants 76,731,243.00 

6.  Miscellaneous     grants    to    states    and    territories 

(partly  educational) 87,305,203.05 

7.  Wagon-road  construction  grants 2,867,474.49 

8.  Canal  construction  grants 4,598,698.32 

9.  River  improvement  grants 2,246,251.91 

10.  Railroad  construction  grants 117,550,292.37 

11.  Cash  sales —  Indian  cessions,  mineral  lands,  timber 

and  stone  claims,  and  miscellaneous  cash  sales.  .  287,001,612.29 

Total  alienated,  excluding  Alaska 773>°79>987-38 

12.  Reservations — forest,  reclamation,  parks,  military, 

Indian 194,587,475.62 

Total  alienated  and  reserved,  excluding  Alaska.  967,667,463.00 

13.  Area    unappropriated   and   unreserved,    excluding 

Alaska 473,836,402.00 

14.  Area  unappropriated  and  unreserved  in  Alaska  .  . .  368,035, 975 .00 

Total  unappropriated  and  unreserved 841,872,377.00 

15.  Total   land   surface   in  public  domain,   including 

Alaska 1,809,539,840.00 

16.  Total  land  and  water  surface  in  public  domain,  in- 

cluding Alaska 1,884,021,760.00 


Forest  Lands. — The  policy  of  alienation,  while  on  the  whole 
sound,  is  subject  to  certain  limitations  which  it  is  very  important 


590  OUTLINES   OF   ECONOMICS 

to  note.  First  of  these  is  the  case  of  forests.  The  ruthless  denuda- 
tion of  our  timber  lands,  the  striking  advance  in  the  price  of  lumber 
indicating  that  the  supply  has  not  kept  pace  with  the  demand,  and 
the  meteoric  development  and  rapid  decline  of  the  lumber  industry 
in  many  localities  of  the  Northwest,  all  combine  to  demonstrate 
that  alienation  and  private  ownership  have  failed  to  produce  that 
careful  industrial  management  which  conduces  to  the  greatest 
use  and  the  greatest  good  in  the  long  run.  More  important  still, 
we  have  come  to  realize  that  the  most  productive  use  of  other  great 
natural  resources  has  not  been  subserved  by  the  private  ownership 
of  the  forests.  Climate  and  rainfall,  the  regular  flow  of  streams, 
the  success  of  the  great  irrigation  works  which  we  are  buildingj 
and  the  proper  development  of  our  mines,  all  depend  more  or 
less  upon  the  permanent  preservation  of  our  forests;  but  private 
ownership  and  management  in  the  past  has  led  to  destruction, 
not  preservation. 

The  United  States  awoke  very  slowly  to  these  truths.  Prussia 
abandoned  the  policy  of  disposing  of  forest  lands  in  1 83 1 .  France 
and  Austria  began  to  increase  their  forest  holdings  about  1870. 
But  it  was  not  until  1876,  in  the  United  States,  that  an  awakened 
interest  showed  itself  in  a  congressional  appropriation  of  two  thou- 
sand dollars  for  the  purpose  of  employing  "a  competent  man 
to  investigate  timber  conditions  in  the  United  States."  In  1881 
a  Division  of  Forestry  was  created  in  the  Department  of  Agri- 
culture which  expanded  into  the  Bureau  of  Forestry  in  1901,  and 
into  the  Forest  Service  in  1905.  In  1891  a  forward  step  was 
taken  by  the  passage  of  an  act  authorizing  the  President  to 
establish  forest  reserves;  and  in  the  same  year  the  first  forest 
reserve  was  established.  In  November,  1907,  the  area  of  the 
national  forest  reserves  had  increased  to  159,439,979  acres;  the 
forest  service  had  developed  to  a  point  where  it  was  able  to 
care  for  the  management  of  this  vast  national  industry,  and  to 
cooperate  further  with  private  owners  in  establishing  the  principles 
of  scientific  forestry,  while  the  policy  of  alienation  has  been 
modified  to  an  extent  amounting  almost  to  reversal.  Instead  of 
selling  forests,  tJie  government  is  now  permitting  timber  to  be  cut  in 
a  way  to  preserve  the  forests.  The  revenue  from  this  source  at  the 


PUBLIC   REVENUES  591 

present  time  is  nearly  $2,000,000,  but  that  is  a  secondary  con- 
sideration. The  important  point  is  that  the  government  has 
demonstrated  its  ability  to  manage  the  forests  along  lines  at  once 
scientific  and  commercial.  In  many  European  countries,  how- 
ever, a  greater  revenue  is  secured  from  the  forests.  In  France, 
for  example,  the  public  forests  cover  nearly  18  per  cent  of  the 
entire  land  surface  of  the  country,  and  yield  approximately,  it 
is  reported,  $2.50  per  acre  annually,  —  giving  a  revenue  of  about 
$59,000,000  a  year.  "The  Prussian  budget  for  1903  estimated 
the  gross  receipts  from  forests  at  106,854,000  marks,  and  the  net 
receipts  at  60,000,000  marks."  In  the  United  States  at  present 
25  per  cent  of  what  is  received,  according  to  law,  goes  to  the  states 
and  territories  in  which  the  reserves  are  situated  for  public  roads 
and  schools?  It  is  estimated  that  in  a  few  years  the  reserves  will 
yield  not  less  than  $5,000,000  a  year. 

Experience  has  shown  that  the  public  ownership  and  manage- 
ment of  forests  is  far  more  efficient  than  private  ownership  and 
management.  This  is  due  to  the  length  of  time  required  to  realize 
upon  investments  in  this  industry,  its  routine  character,  the  large 
area  one  man  can  supervise,  and,  perhaps  chiefly  to  the  fact  that 
the  government  in  its  management  takes  into  account  the  interests 
of  the  community  as  a  whole.  Although  private  corporations  may 
make  plans  for  a  long  period  of  time,  they  are  less  desirable  owners 
and  managers,  especially  in  the  last  particular.  The  property  tax, 
as  now  levied,  is  one  of  the  greatest  enemies  of  rational  forestry 
by  private  owners.  The  State  spends  millions  of  dollars  to  pre- 
serve the  forests,  and  yet  enforces  a  tax  that  puts  a  premium 
upon  their  destruction. 

Mineral  Lands.  —  Our  experience  with  timber  lands  is  im- 
portant as  showing  that  private  ownership  of  some  kinds  of 
land  has  not  resulted  in  the  greatest  or  wisest  use  of  that  land. 
Our  experience  with  mineral  lands  demonstrates  that  the  policy 
of  disposing  of  public  lands  in  small  holdings,  free  of  cost  or  at 
prices  far  below  their  real  value,  has  not  led  to  a  widespread  partici- 
pation in  the  use  and  profit  of  those  lands.  The  reason  for  this, 
broadly  speaking,  is  that  our  policy  of  alienation  in  small  hold- 
ings conflicts  with  the  requirements  and  necessities  of  modern 
industry.  In  disposing  of  our  lands  we  have  tried  to  balk  the 


592  OUTLINES   OF   ECONOMICS 

corporation  and  the  speculator  in  order  to  subsidize  the  settler  and 
home  builder.  For  instance,  we  have  made  the  recipients  of 
homesteads  and  mineral  claims  swear  that  they  are  not  acting  as 
agents  "for  any  person,  corporation,  or  syndicate"  or  "in  collusion 
with  any  person,  corporation,  or  syndicate,  to  give  them  the  benefit 
of  the  land  entered,"  and  that  the  land  is  not  being  secured  "for 
the  purpose  of  speculation."  Yet  for  purposes  of  grazing  and  in 
less  degree  for  mining  and  lumbering,  modern  industrial  methods 
require  that  large  tracts  of  land  shall  be  worked  together,  and  that 
individual  claims  shall  be  consolidated.  The  core  of  the  difficulty 
has  been  well  described  by  President  Roosevelt  in  these  words: 
"It  is  a  scandal  to  maintain  laws  which  sound  well  but  which 
make  fraud  the  key  without  which  great  natural  resources  must 
remain  closed.  The  law  should  give  individuals  and  corporations, 
under  proper  government  regulation  and  control,  the  right  to  work 
bodies  of  coal  lands  large  enough  for  profitable  development." 
And  the  President  thereafter  recommends  that  laws  shall  be  passed 
which  shall  authorize  the  leasing,  instead  of  the  complete  alienation, 
of  coal,  oil,  and  gas  rights,  as  well  as  grazing  rights  on  the  public 
domain.  Bills  are  now  pending  in  Congress  which  look  to  the 
leasing  of  mineral  lands  rather  than  their  sale,  and  there  is  little 
doubt  that  the  policy  of  complete  alienation  will  be  sooner  or  later 
followed  by  a  royalty  or  rental  system. 

Already  the  royalty  system  has  been  adopted  by  some  of  the 
commonwealth  governments,  and  year  by  year  the  policy  of  com- 
plete alienation  is  more  and  more  restricted.  In  a  few  years,  in 
some  of  the  Western  states,  these  leases  will  probably  provide 
enormous  revenues.  The  state  of  Minnesota,  for  instance,  in 
which  the  royalty  system  has  been  inaugurated,  received  $163,833 
from  royalties,  and  $31,985  from  prospecting  permits  and  fifty-year 
leases  in  the  fiscal  year  ending  July  31,  1907.  The  auditor  of  the 
state,  in  speaking  of  the  Vermilion  and  Messabe  iron  ranges,  says 
that  on  contracts  now  in  existence  perhaps  one  hundred  million 
dollars  will  be  realized  for  the  school  and  university  funds. 1 

•Auditor's  Report  for  1905-1906,  p.  liv.  Data  given  in  the  Preliminary  Re- 
port of  the  Minnesota  Tax  Commission  for  1907,  Chap.  V,  however,  seem  to 
indicate  that  $50,000,000  would  be  a  safer  estimate. 


PUBLIC   REVENUES 


593 


The  Success  of  our  Land  Policy.  —  In  a  rough,  general  way, 
our  land  policy  has  been  a  success,  as  is  shown  by  the  unprece- 
dented and  almost  feverish  development  of  the  country  in  the  last 
century,  with  the  creation  of  a  fund  of  taxable  values  which  makes 
it  an  easy  matter  for  the  state  governments  to  raise  all  the  revenue 
which  they  need.  But  in  some  respects  it  has  signally  failed.  In 
the  first  place  it  has  not  paid :  more  money  has  been  spent  for  the 
purchase,  survey,  and  care  of  the  public  lands  than  has  been  re- 
ceived from  their  sale  and  lease.  In  the  second  place,  certain 
kinds  of  lands,  as  we  have  shown,  should  not  have  been  alienated. 
And  in  the  third  place,  our  efforts  to  give  land  to  the  landless  have 
bred  an  immense  amount  of  corruption,  fostered  speculation,  en- 
dowed private  monopoly  with  public  wealth,  and  pauperized  whole 
communities.  One  has  only  to  recall  the  recent  convictions  of 
public  officers  for  land  frauds,  and  to  read  the  report  of  the  Com- 
mission on  Public  Lands,  —  to  which  specific  reference  is  given  at 
the  end  of  the  chapter,  —  to  appreciate  the  truth  of  all  these  charges. 
The  desert  land  law  and  the  commutation  clause  of  the  Homestead 
Act,  they  tell  us,  operate  far  too  often  "to  bring  about  land  mo- 
nopoly rather  than  to  multiply  small  holdings  by  actual  settlers." 
...  "In  many  localities,  and  perhaps  in  general, a  larger  pro- 
portion of  the  public  land  is  passing  into  the  hands  of  speculators 
and  corporations  than  into  those  of  actual  settlers  who  are  making 
homes."  .  .  .  "Nearly  everywhere  the  large  landowner  has  suc- 
ceeded in  monopolizing  the  best  tracts,  whether  of  timber  or  of 
agricultural  land."  .  .  .  "Your  commission  has  had  inquiries 
made  as  to  how  a  number  of  estates,  selected  haphazard,  have 
been  acquired.  Almost  without  exception,  collusion  or  evasion 
of  the  letter  and  spirit  of  the  land  laws  was  involved."  .  .  .  "The 
fundamental  fact  that  characterizes  the  present  situation  is  this: 
that  the  number  of  patents  issued  is  increasing  out  of  all  propor- 
tion to  the  number  of  new  homes." 

Possibly  the  most  important  lesson  to  be  derived  from  the  his- 
tory of  our  landed  domain  is  the  vital  truth  that  the  government 
cannot  give  away  valuable  lands  or  sell  them  at  prices  far  below 
their  real  value  without  subsidizing  the  speculator,  endowing 
monopoly,  and  pauperizing  the  people.  The  poorer  classes  derive 


594  OUTLINES  OF  ECONOMICS 

no  real  benefit  from  this  indiscriminate  public  charity.  As 
Secretary  of  the  Interior  Hitchcock  said  in  1905,  in  discussing 
the  Timber  and  Stone  Act:1  "Many  transfers  of  land  patented 
under  this  law  are  made  immediately  upon  completion  of  title  to 
individuals  and  companies.  In  this  way  a  monopoly  of  the  timber 
supplies  of  the  public-land  states  is  being  created  by  systematic 
collusion.  ...  It  has  been  urged  in  behalf  of  this  act  that  it 
enables  poor  men  to  enjoy  the  bounty  of  the  government  by  ob- 
taining tracts  of  land  which  they  can  afterwards  sell  with  advan- 
tage. A  careful  study  seems  to  show,  on  the  contrary,  that  the 
original  entrymen  rarely  realize  more  than  ordinary  wages  for  the 
time  spent  in  making  the  entry  and  completing  the  transfer.  The 
corporations  which  ultimately  secure  title  usually  absorb  by  far 
the  greater  part  of  the  profit."  When  Uncle  Sam  was  rich  enough 

—  or  was  supposed  to  be  rich  enough  —  to  provide  us  all  with  a 
farm,  the  policy  of  giving  avray  the  public  domain  appeared  to  be 
in  harmony  with  the  principle  of  equality  of  opportunity.     But 
when  the  supply  is  far  below  the  demand,  those  who  receive  gifts 
by  lot  or  similar  methods  are  in   receipt  of  special   privileges. 
What  once  seemed  fair  has,  in  the  course  of  economic  evolution, 
become  unfair  and  demoralizing. 

Our  conclusion  may  be  formulated  in  the  following  general  rule : 
only  those  lands  should  be  wholly  alienated  whose  use  and  devel- 
opment under  private  ownership  lead  neither  to  monopoly  nor  to 
exhaustion  and  waste.  Or,  in  more  concrete  terms,  —  remem- 
bering that  the  maxim  applies  only  to  those  lands  left  to  the  gov- 
ernment, and  to  the  majority  of  cases,  not  to  every  specific  case, 

—  the  rule  for  agricultural  lands  should  be  private  ownership  and 
management,  for  forest  lands  State  ownership  and  management, 
for  mining  and  grazing  lands  State  ownership  and  private  man- 
agement under  a  lease  or  royalty  system,  by  which  the  State  shall 
secure  a  share  of  the  profits  and  retain  a  large  amount  of  regulation 
and  control.     In  disposing  of  its  lands  the  government  should 
endeavor  to  charge  value  received,  as  gifts  of  valuable  land,  or  sale 
at  inelastic  tariffs  of  prices  which  place  an  extreme  valuation  upon 
some  tracts  and  an  utterly  inadequate  valuation  upon  others,  lead 

1  Report  of  the  Secretary  of  the  Interior,  1905,  p.  331. 


PUBLIC   REVENUES  595 

to  speculation  and  monopoly,  having  most  of  the  demoralizing 
features  of  a  public  lottery  in  which  the  prizes  are  distributed 
partly  by  chance  and  partly  in  accordance  with  the  cunning, 
chicanery,  and  unscrupulousness  of  the  participators.  Under 
existing  conditions  the  poorer  classes  of  society  get  almost  none 
of  the  valuable  lands.  Charge  value  received,  and  the  people,  the 
masses,  get  their  share  in  the  revenues  flowing  to  the  public  treas- 
ury, in  reduced  taxes,  and  more  generous  expenditures  for  educa- 
tional, protective,  and  developmental  purposes. 

Land  Nationalization  and  Municipalization.  —  In  recent  years 
both  state  and  national  legislation  has  shown  a  decided  trend 
toward  the  adoption  of  methods  which  will  yield  both  greater 
revenue  and  greater  control  of  those  varied  forms  of  national 
wealth  which  we  collectively  designate  "land."  The  object  of 
this  legislation  is  to  prevent  monopoly  and  give  to  society  a  share 
in  the  land  values  created  by  social  growth.  One  of  the  most  in- 
genious plans  for  securing  this  end  ever  proposed  is  the  single-tax 
scheme  defended  with  great  eloquence  and  earnestness  by  the  late 
Henry  George.  His  scheme,  usually  called  "the  single  tax,"  is 
stated  thus  in  his  own  words,  printed  in  his  organ,  The  Standard: 

"  The  Standard  advocates  the  abolition  of  al!  taxes  upon  industry  and  the 
products  of  industry,  and  the  taking,  by  taxation  upon  land  values,  irrespec- 
tive of  improvements,  of  the  annual  rental  value  of  all  those  various  forms  of 
natural  opportunities  embraced  under  the  general  term  'land.' 

"We  hold  that  to  tax  labor  or  its  products  is  to  discourage  industry. 
We  hold  that  to  tax  land  values  to  their  full  amount  will  render  it  impossible 
for  any  man  to  exact  from  others  a  price  for  the  privilege  of  using  those 
bounties  of  nature  in  which  all  living  men  have  an  equal  right  of  use;  that 
it  will  compel  every  individual  controlling  natural  opportunities  to  utilize 
them  by  employment  of  labor  or  abandon  them  to  others;  that  it  will  thus 
provide  opportunities  of  work  for  all  men  and  secure  to  each  the  full  reward 
of  his  labor;  and  that  as  a  result  involuntary  poverty  will  be  abolished,  and 
the  greed,  intemperance,  and  vice  that  spring  from  poverty  and  the  dread  of 
poverty  will  be  swept  away." 

Mr.  George's  proposition  rests  upon  an  extreme  application  of 
the  doctrines  of  individualism  and  natural  rights.  Man,  he  holds, 
has  an  inalienable  and  equal  right  to  live,  and  consequently  an 
inalienable  and  equal  right  to  those  natural  agents  which  we  call 


596  OUTLINES   OF  ECONOMICS 

land,  and  without  which  human  life  cannot  exist.  This  right 
which  attaches  to  the  individual  cannot  be  abrogated  by  law  or 
custom,  nor  can  it  be  alienated  by  one  generation  or  set  of  law 
givers.  Moreover,  it  is  an  equal  right.  A,  B,  and  C  each  have  a 
right  to  the  soil,  but  A  has  no  right  to  better  soil  than  B  or  C  ;  in 
consequence  of  which  that  part  of  land  values  which  arises  from 
the  differential  qualities  of  land  belongs  to  society  as  a  whole,  and 
not  to  particular  individuals.  But  the  differential  value  of  land 
expresses  itself  in  the  economic  rent  which  it  yields,  and  conse- 
quently, if  society  seizes  this  rent  by  taxation,  it  will  satisfy  the 
demands  of  the  doctrine  of  natural  rights,  while  leaving  the  actual 
management  and  exploitation  of  land  in  the  hands  of  individual 
occupiers,  thus  avoiding  the  perils  of  direct  public  management. 

Man  also  has  an  unalienable  right,  Mr.  George  held,  to  the  fruits 
of  his  own  labor.  As  the  outcome  of  this  right,  Mr.  George  con- 
cluded that  ordinary  taxation  upon  property  other  than  land,  upon 
the  product  of  labor  as  distinguished  from  land,  the  gift  of  God,  is 
robbery.  In  his  view  it  is  as  immoral  to  levy  an  ordinary  tax  as  it 
is  criminal  to  fail  to  tax  that  surplus  which  attaches  to  the  better 
classes  of  lands,  and  which  we  call  economic  rent. 

The  policy  embodied  in  Mr.  George's  scheme  differs  funda- 
mentally from  the  policy  which  we  have  seen  creeping  into  recent 
legislation.  The  latter  purposes  to  reserve  only  a  part  of  the 
value  given  to  some  forms  of  land  by  social  development.  Mr. 
George  proposes  to  confiscate  all  of  "the  unearned  increment." 
Most  important  of  all,  the  former  proposition  applies  only  to  the 
future  unearned  increment,  and  purposes  only  to  take  a  part,  and 
that  only  after  fair  notice  is  given.  Mr.  George  proposes  to  take 
all  the  unearned  increment,  past  and  present,  and  that  whether 
the  present  owners  have  been  encouraged  to  believe  that  they 
might  be  permitted  to  appropriate  the  whole  unearned  increment 
or  not.  Herein  lies  the  essential  injustice  of  Mr.  George's  scheme. 
As  a  nation  we  have  induced  immigrants  and  settlers  to  take  up 
lands,  clear  them,  and  develop  them  with  their  labor  and  toil,  with 
the  promise  that  the  values  thus  created  by  themselves  and  their 
neighbors  should  belong  to  them.  Their  risks  and  their  sacrifices 
have  been  great.  Even  if  we  assume  that  the  State  made  a  mistake 


PUBLIC    REVENUES  597 

in  pursuing  this  policy,  the  results  of  the  mistake  must  be  cheer- 
fully borne  by  the  party  at  fault,  the  State  itself. 

Mr.  George  not  only  proposes  to  confiscate  all  economic  rent 
without  compensation,  and  to  abolish  all  other  forms  of  taxation, 
but  the  assertion  is  made  in  explanation  and  justification  of  the 
policy  that  it  will  abolish  poverty.  Such  a  policy  might,  indeed, 
prevent  landowners,  who  do  not  care  to  use  their  land,  from  keep- 
ing it  out  of  the  hands  of  those  who  would  use  it;  but  how  it  would 
effect  all  the  other  predicted  blessings  is  difficult  for  most  people  to 
comprehend.  In  the  first  place,  it  is  difficult  to  imagine  how  pure 
economic  rent  of  agricultural  land  can  be  separated  in  practice 
from  the  annual  value  of  the  separable  improvements  on  the  land. 
But  apart  from  this  difficulty,  the  appropriation  of  economic  rent 
by  the  public  without  compensation  to  the  owners  will  probably 
never  appeal  to  the  conscience  of  the  American  public  as  a  just 
thing  to  do.  No  abstract  reasoning,  based  on  "natural  rights," 
will  persuade  a  modern  nation  to  so  radical  a  step.  This  honestly 
and  earnestly  advocated  policy  is  only  one  more  illustration  of  the 
danger  of  basing  social  reasoning  on  any  theory  of  "natural 
rights." 

In  cities  it  is  easier  to  separate  the  pure  economic  rent  from  the 
earnings  of  improvements,  such  as  buildings.  Moreover,  it  is  in 
cities  that  the  principal  evils  attendant  on  private  landholding 
are  discoverable.  Therefore  the  objections  to  land  nationalization 
do  not  in  the  same  degree  apply  to  land  municipalization.  Many 
who  will  reject  the  one  will  favor  the  other.  Even  here,  however, 
it  is  well  to  proceed  very  cautiously.  Confiscation,  at  any  rate, 
should  not  be  tolerated.  If  great  and  expensive  changes  along 
this  line  should  approve  themselves  to  the  people,  the  burden  of 
the  changes  should  be  widely  diffused  throughout  the  community 
by  means  of  inheritance  and  other  taxes.1 

Public  Industries.  —  In  the  beginning,  let  us  briefly  pass  in 
review  the  principal  classes  of  industrial  enterprise  in  which  the 
modern  State  engages  for  the  satisfaction  of  other  than  State 
wants;  because,  obviously,  we  are  not  concerned  with  enterprises 
like  the  government  printing  office,  the  government  navy  yards. 
1  See  pp.  364  and  365  for  further  discussion  of  the  single  tax. 


598  OUTLINES   OF  ECONOMICS 

and  in   general,  those  incidental  industries  whose  products  the 
government  consumes  but  does  not  regularly  sell. 

I.  First,  we  find  States  like  Switzerland  monopolizing  the  manu- 
facture of  alcohol  and  certain  alcoholic  beverages,  Japan  monopo- 
lizing the  opium  traffic  in  Formosa,  or  commonwealths  like  South 
Carolina  engaging  in  the  retail  distribution  of  intoxicating  bever- 
ages.1   The  purpose  of  the  State  in  engaging  in  such  industries  is 
primarily  sumptuary;   it  is  desired  to  regulate  the  traffic  almost 
to  the  point  of  suppression,  perhaps.    Ordinarily  a  good  revenue 
would  be  secured,  but  revenue  is  a  very  secondary  consideration. 
Prices  will  be  placed  above  the  level  of  highest  net  profit,  and  not 
improbably  the  ideal  of  regulating  consumption  will  be  so  vigor- 
ously pursued  that  profits  will  disappear  altogether. 

II.  Secondly,  we  have  the  group  of  so-called  "fiscal  monopolies." 
France,  for  instance,  monopolizes  the  manufacture  of  matches, 
cigarettes,  and  tobacco  in  general;    Japan 2  has  recently  gone 
farther  than  any  other  country  in  the  creation  of  fiscal  monopolies ; 
while  Prussia,  Austria,  Italy,  Spain,  and  other  European  countries 
maintain  public  lotteries  —  as  did  many  of  the  American  colonies 
during  the  eighteenth  century.    The  primary  object  of  the  State 
in  undertaking  these  enterprises  is  public  revenue,  gain;    and 
naturally  a  monopoly  price  is  charged,  the  price  which  will  yield 
the  greatest  net  revenue. 

III.  Next,  we  have  a  group  of  enterprises  consisting  principally 
of  the  so-called  "natural  monopolies,"  which  the  State  undertakes 
not  for  suppression,  not  for  profit,  but  primarily  for  regulation  — 
to  regulate  the  quality  of  the  product,  as  in  the  case  of  water;   to 
maintain  effectively  what  have  been  called  "equitable  conditions 
for  the  prosecution  of  private  business,"  as  in  the  case  of  railways; 
to  prevent  monopolistic  extortion  and  corporate  abuse,  as  in  the 
case  of  lighting  companies,  the  post  office,  the  telegraph,  and  the 
telephone;  or  to  prevent  crime  and  preserve  intact  the  foundations 
of  commercial  prosperity,  as  in  the  monopoly  of  coinage.    The 
charges  here  are  ordinarily  adjusted  to  either  the  "revenue"  or  the 

1  Since  writing  the  above,  South   Carolina  has  abandoned   the  dispensary 
system. 

*  Cf.  recent  magazine  articles. 


PUBLIC   REVENUES  599 

"cost"  principle,  that  is  to  say,  the  State  will  either  aim  to  make  a 
fair  business  profit  such  as  is  secured  in  competitive  private  enter- 
prises, or  it  will  endeavor  approximately  to  meet  expenses  by 
adjusting  its  charges  to  the  cost  of  production.  England,  France, 
and  Germany,  in  ordinary  years,  obtain  handsome  revenues  from 
their  respective  postal  departments,  but  in  the  United  States  the 
accounts  of  the  Post  Office  Department  show  a  regular  annual 
deficit  ($6,653,282  in  the  fiscal  year  1906-1907),  and  taking  the 
world  over,  the  cost  principle  in  this  group  of  industries  is  probably 
more  common  than  the  revenue  principle,  and  deficits  more  com- 
mon than  net  profits.  In  the  United  States  the  post  office  has 
always  been  regarded  as  a  developmental  agency  rather  than  a 
business  enterprise,  and  might  more  logically,  perhaps,  be  included 
in  the  next  category. 

IV.  Finally,  we  have  a  large  and  heterogeneous  group  of  in- 
dustries which  are  maintained  principally  for  service,  for  their  edu- 
cational and  developmental  influence,  not  primarily  for  regulation, 
and  not  at  all  for  profit,  but  "for  the  public  good."  We  include 
here  not  only  schools  and  educational  institutions  of  all  kinds,  but 
roads  and  canals;  the  savings  banks  and  public  pawn  shops  main- 
tained in  several  countries  of  continental  Europe;  workingmen's 
insurance  as  developed  by  Germany,  Austria,  and  several  of  the 
Australian  colonies;  and  the  model  manufacturing  establishments 
such  as  France  maintains  for  the  production  of  tapestries  and  fine 
porcelains.  In  this  group  charges  will  sink  to  a  minimum,  and  in 
some  lines  of  enterprise,  such  as  education,  practically  disappear. 
Revenue  here  is  not  only  a  minor,  but  is  almost  a  negligible, 
consideration. 

A  brief  consideration  of  the  incomplete  list  of  State  industries 
given  above  brings  out  several  important  truths.  In  the  first  place, 
it  is  evident  that  only  a  few  of  these  industries,  the  fiscal  monopo- 
lies, have  been  taken  over  by  the  State  for  the  purpose  of  revenue, 
and  fiscal  monopolies  are  decreasing  rather  than  increasing  in 
relative  importance.  In  the  second  place,  it  is  equally  as  clear 
that,  on  the  whole,  public  industries  are  sources  of  expense  and 
not  of  profit.  When  Professor  Bastable,  for  example,  tells  us  that 
in  England,  in  the  fiscal  year  1893-1894,  only  6  per  cent  of  the 


600  OUTLINES    OF   ECONOMICS 

national  revenue  came  from  public  industries  and  other  non-tax 
sources,  that  in  the  local  revenues  of  England  and  Wales  (1891- 
1892)  taxation  stood  to  other  sources  of  revenue  in  the  ratio  of  five 
to  one,  that  in  Prussia  about  20  per  cent  of  the  national  reve- 
nue comes  from  the  domain  and  industrial  enterprises,  and  in 
India  something  less  than  50  per  cent  from  "quasi-private  sources 
of  revenue,"  he  is  careful  to  warn  us  that  the  statistics  take  no 
cognizance  of  interest  payments  chargeable  to  the  several  indus- 
tries, or  of  depreciation,  or  of  related  industries  in  which  deficits 
and  not  profits  were  secured.  When  estimating  the  importance  of 
railway  earnings  in  the  revenue  account,  no  cognizance  is  ordi- 
narily taken  of  the  canal  deficit.  In  the  third  place,  we  perceive 
from  the  nature  of  the  industries  that  they  cannot  wisely  be  oper- 
ated for  profit  in  many  cases.  Education,  for  instance,  has  been 
taken  over  by  the  State  for  the  very  purpose  of  charging  less  than 
the  cost  of  the  service.  The  unquestionable  tendency  is  for  the 
prices  of  goods  and  services  supplied  by  a  democratic  State  to  sink 
below  the  cost  of  production,  and  this,  in  itself,  is  neither  good  nor 
bad,  fortunate  nor  unfortunate.  The  public  financier,  in  adjusting 
the  charges,  must  not  look  to  profit.  His  only  aim  is  the  solus 
populi,  and  this  policy  requires  here  a  prohibitive  price,  there  a 
cost  price,  and  again  free  service.  Finally,  it  appears,  the  problem 
of  public  charges  can  be  settled  only  with  reference  to  a  particular 
time,  place,  and  industry.  England  finds  it  expedient  to  raise  a 
handsome  revenue  from  her  post  office,  while  the  United  States 
manages  our  post  office  at  a  loss.  Waterworks  are  successfully 
conducted  by  most  of  the  large  American  municipalities,  but  public 
lighting  experiments  in  this  country  have  not  been  equally  suc- 
cessful. India  raises  half  of  her  revenues  from  non-tax  sources 
largely  because  heavy  taxation  of  the  ordinary  kind  would  be  im- 
possible. The  French  tobacco  monopoly  succeeds  because  the 
French  government  can  supervise  and  trace  almost  every  pound 
of  tobacco  grown  in  France.  In  the  United  States  this  would  be 
impossible. 

Although  we  cannot  decide  in  a  general  way  what  theory  of 
charges  should  be  followed  in  particular  public  industries,  it  is 
possible  to  lay  down  general  rules  which  will  assist  in  reaching  a 


PUBLIC   REVENUES  6oi 

correct  conclusion  in  specific  cases.  Assuming  that  the  industry 
in  question  supplies  a  service  rather  than  a  commodity,  merely  to 
save  words  in  the  discussion,  we  must  first  of  all  inquire:  (a)  Is 
the  service  helpful  or  harmful  in  its  net  social  effect  ?  According 
as  it  is  one  or  the  other,  we  will  incline  in  our  charges  toward  the 
gratuity  principle  or  the  prohibitive  principle.  If  harmful,  how- 
ever, it  is  plain  that  we  must  not  make  the  charges  high  enough  to 
encourage  smuggling  or  illicit  manufacture.  If  helpful,  on  the 
other  hand,  we  cannot  at  once  decide  upon  the  gratuity  principle, 
but  must  inquire  farther,  (6)  How,  generally,  is  the  service  en- 
joyed ?  If  only  a  small  portion  of  the  community  enjoys  the  serv- 
ice, it  would  usually  be  unjust  to  charge  less  than  cost,  because 
the  deficit  would  be  borne  by  general  taxation  falling  upon  the 
entire  community,  unless,  indeed,  the  benefit  to  one  restricted  class 
is  seen  to  be  of  advantage  to  the  whole  community,  in  such  a 
degree  that  the  rest  of  the  community  is  willing  to  bear  the  deficit, 
as  in  the  case  of  public  charity. 

(c)  Assuming  that  the  service  benefits  the  whole  community, 
this  is  still  not  sufficient  to  justify  a  charge  less  than  the  cost  of  pro- 
duction. The  problem  is  one  of  comparative  costs.  We  must  in- 
quire whether  greater  benefit  would  not  be  secured  by  charging 
enough  to  raise  a  profit  and  then  distributing  that  profit  through 
the  maintenance  of  some  other  gratuitous  enterprise,  or,  if  the  tax 
system  weighs  heavily  on  the  poor,  by  remitting  taxation  to  the 
extent  of  the  profit,  (d)  If  all  these  questions  are  answered  in 
favor  of  the  gratuity  principle,  we  still  must  consider,  What  effect 
will  gratuitous  service  have  upon  the  cost  of  the  service  ?  Will  it 
encourage  wastefulness?  Free  city  water,  for  example,  would 
probably  prove  impracticable  because  of  waste,  but  free  parks  or 
free  education  do  not  lead  to  inordinate  or  unnecessary  consump- 
tion. The  question  is  a  vital  one,  but  it  is  not  always  to  be  an- 
swered one  way,  as  some  critics  of  government  ownership  seem  to 
believe,  (e)  Closely  related  to  the  above,  is  the  question  of  pauper- 
ization. Some  things  the  State  may  safely  give  away,  and  some 
not.  The  modern  city,  for  example,  may  give  band  concerts  free, 
in  our  view,  to  the  undoubted  edification  of  the  community;  but  in 
Rome  the  public  games  demoralized  the  populace.  (/)  Finally, 


602  OUTLINES   OF   ECONOMICS 

we  have  to  ask,  What  effect  will  gratuitous  service  have  on  in- 
comes ?  Henry  George  proposed  that  our  cities  should  operate  the 
street  car  lines  gratuitously,  and  the  argument  in  its  favor  is  far 
stronger  than  might  be  expected  on  first  thought.  But  what  effect 
would  this  gratuitous  service  have  upon  the  incomes  of  the  laboring 
classes  ?  Take  the  case  of  the  worker  in  New  York  City  earning 
$3.00  a  day.  Will  his  wages  remain  at  $3.00,  if  street  car  service 
is  offered  free  of  charge  ?  Will  not  the  migration  to  New  York  be 
increased,  so  that  wages  will  fall?  And  may  not  the  gain  ulti- 
mately fall  to  owners  of  house  property  in  the  form  of  enhanced 
rents  ? 

All  these  questions  must  be  answered  before  the  tariff  of  charges 
can  be  adopted,  and  it  is  plain  that  the  answers  will  be  determined 
by  the  particular  conditions  of  time,  industry,  and  place,  particu- 
larly by  the  character  of  the  industry.  The  nearest  approach  to  a 
general  rule  which  can  be  formulated,  may  be  stated  as  follows: 
In  proportion  as  a  service  or  commodity  tends  to  the  upbuilding  of 
character  and  personality,  we  should,  so  far  as  fiscal  conditions  per- 
mit, gradually  move  in  the  direction  of  the  principle  of  gratuitous 
service.  If  the  service  or  commodity  itself  is  widely  consumed  and 
is  as  desirable  as  anything  among  vendible  commodities,  particularly 
if  large  consumption  is  desirable  and  waste  in  consumption  does  not 
become  excessive,  the  principle  of  gratuitous  service  may  be  recom- 
mended. 

Limitations  of  space  prevent  further  treatment  of  the  subject  of 
public  industries.  The  important  thing  to  understand  is  that  the 
moment  an  industry  is  taken  over  by  the  government,  that  moment 
the  question  of  profit  —  which  is  the  vital  consideration  under 
private  management  —  becomes  of  secondary  importance,  sub- 
ordinate to  questions  of  public  policy;  and  the  interjection  of 
public  policy  into  the  determination  of  prices  or  charges,  creates  a 
problem  whose  complexity  and  difficulty  can  scarcely  be  exag- 
gerated. At  the  present  time,  for  instance,  we  do  not  even  know 
whether  our  second  class  postal  rates  pay  for  the  cost  of  carriage 
and  delivery  of  second  class  matter,  to  say  nothing  of  the  question 
whether  such  matter  ought  to  be  carried  at  less  than  cost.  Just 
now  the  indications  are  that  the  State  will  take  over  an  increasing 


PUBLIC    REVENUES  603 

number  of  industries,  or  at  least  exert  a  constantly  increasing  in- 
fluence upon  the  rates  and  charges  of  quasi-public  industries. 
Under  these  circumstances  our  present  duty  is  to  institute,  both  in 
public  and  quasi-public  industries,  a  thoroughgoing  system  of  cost 
accounting,  so  that  we  shall  understand  upon  what  footing  each 
branch  of  the  industry  rests.  Our  second  duty,  which  falls  pri- 
marily upon  economists  and  statesmen,  is  to  develop  a  far  more 
satisfactory  theory  of  public  charges,  for  at  the  present  time  we 
hardly  understand  the  many  factors  that  must  be  considered  in 
this  problem,  much  less  the  net  meaning  or  resultant  of  these 
factors. 

QUESTIONS 

1.  What  proportion  of  the  public  receipts  comes  from  the  public  domains? 
What  gives  importance  to  the  question  of  revenue  from  government  owner- 
ship? 

2.  Are  public  debts  a  burden  when  represented  by  paying  investments? 
by  non-revenue-bearing  investments  ? 

3.  Do  State  debts  indicate  impoverishment  of  the  people?    Why? 

4.  What  expenditures  should  be  met  by  taxation?   by  loans?      What  is 
the  natural  limit  of  each? 

5.  How  was  the  State  supported  in  primitive  times?    What  connection 
is  there  between  taxation  and  representative  government? 

6.  What  has  been  the  principal  aim  of  the  United  States  in  the  manage- 
ment of  public  lands?     How  has  this  aim  changed? 

7.  Why  do  the  poorer  classes  benefit  least  by  the  homestead  acts  and  by 
the  sale  of  the  public  lands  at  prices  below  their  real  value  ? 

8.  Have  as  many  acres  of  land  been  given  to  individuals  by  the  homestead 
and  similar  acts  as  to  the  railways? 

9.  What  kinds  of  land  should  be  both  owned  and  managed  by  govern- 
ment?   Why? 

10.  What  are  the  advantages  and  disadvantages  of  the  royalty  or  lease 
system  ?    To  what  kinds  of  land  should  it  be  applied  ? 

n.   What  conflict  is  there  between  modern  industrial  methods  and  the 
project  of  giving  land  to  the  landless? 

12.  What  connection  is  there  between  "natural  right"  and  the  single- 
tax  scheme? 

13.  Is  there  any  absolute,  inalienable  right  to  life?  to  anything? 

14.  Should  State  industries  be  managed  so  as  to  yield  a  profit?    Is  a 
profit  inconsistent  with  good  State  management?     Is  any  general  tendency, 
with  respect  to  profits,  discernible  in  the  management  of  particular  public 
industries  ? 


604  OUTLINES   OF   ECONOMICS 

REFERENCES 

ADAMS,  H.  C.  Public  Debts,  and  The  Science  of  Finance,  Part  II,  Book  II, 
Chap.  I,  "Revenue  from  Public  Domains,"  pp.  237-260;  Chap.  II, 
"Revenue  from  Public  Industries,"  pp.  261-282. 

BASTABLE,  C.  F.  Public  Finance,  Book  II  and  Book  V,  Chap.  II,  "The 
State  Domain,  Lands  and  Forests,"  pp.  157-178;  Chap.  Ill,  "The 
Industrial  Domain,"  pp.  179-218;  Chap.  IV,  "The  State  as  Capitalist, 
Administrative  Revenue,"  pp.  219-232. 

BULLOCK,  C.  J.  Selected  Readings  in  Public  Finance,  Chap.  IV,  "The 
Views  of  Bodin  and  Smith,"  pp.  50-60;  Chap.  V,  "Revenues  from 
Domains,"  pp.  61-72;  Chap.  VI,  "Revenues  from  Public  Industries," 
pp.  80-116. 

Census  Bulletins,  Nos.  20,  45,  50.     "  Statistics  of  Cities,"  passim. 

Census  Report.     Wealth,  Debt,  and  Taxation,  Part  II  and  Part  IV,  pp.  953- 

963- 
COHN,  GUSTAV.     The  Science  of  Finance,  Book  I,  Chap.  II,  "  The  Public 

Economy  in  Process  of  Growth,"  pp.  82-103. 
DANIELS,  W.  M.     The  Elements  of  Public  Finance,  Part  III,  Chap.  I,  pp. 

285-314;    Part  II,  Chap.  IX,  "Public  Income  from  Quasi-economic 

Sources,"  pp.  207-223. 

PLEHN,  C.  C.     Introduction  to  Public  Finance,  Part  III,  pp.  278-324. 
SELIGMAN,  E.  R.  A.     Essays  in  Taxatiott,  Chap.  IX,  "Classification  of 

Public  Revenues." 
Senate  Document  No.  189,  58th  Congress,  3d  Session.     Report  of  the  Public 

Lands  Commission,  pp.  iii-xxiv. 
SCOTT,  W.  A.     The  Repudiation  of  State  Debts. 
U.  S.   Department  of  Agriculture,   Forest  Service.     The  Use  Book,  1906, 

passim. 


CHAPTER    XXXIV 

PUBLIC   REVENUES:     DERIVATIVE  REVENUES,  FEES, 
SPECIAL  ASSESSMENTS,  AND  TAXES 

Definitions.  —  If  the  reader  will  run  over  the  classification  of 
public  industries  given  in  the  preceding  chapter  (page  598),  he 
will  notice  that  the  corresponding  payments  —  which  descend, 
it  will  be  remembered,  from  prohibitive  to  gratuity  charges  — 
fall  into  two  main  classes:  those  imposed  upon  the  consumer  or 
purchaser  who  specially  benefits  by  the  service,  and  those  — 
like  the  revenues  devoted  to  the  maintenance  of  education  and 
public  parks  —  imposed  upon  the  tax-paying  public  generally, 
irrespective  of  the  benefits  conferred  by  the  service.  Moreover, 
as  we  move  from  the  prohibitive  to  the  gratuity  group,  there  is 
a  general  though  not  regular  change  in  the  degree  and  kind  of 
compulsion  exercised  by  the  State  in  collecting  the  contribution. 
The  State  does  not  encourage  the  purchase  of  intoxicating  liquors 
under  the  Gothenburg  system  in  order  that  the  revenue  may  be 
as  large  as  possible ;  it  actually  discourages  their  sale :  the  use  of 
the  postal  money  order  is  mildly  encouraged,  but  you  may  send 
your  money  by  express  if  you  desire;  one  is  not  forced  to  marry, 
but  if  one  marries  one  is  compelled  to  take  out  a  marriage  license; 
and  whether  one  uses  the  public  schools  or  not,  one  must  help 
pay  for  their  maintenance.  Finally,  it  will  be  noticed  that  as  the 
element  of  compulsion  increases,  the  public  interest  in  the  service 
changes,  and  generally  though  not  always  increases.  The  wood 
sold  from  the  government  forests  is  merely  a  commercial  by- 
product of  an  enterprise  maintained  by  the  government  for  other 
purposes;  the  marriage  license  fee  benefits  the  individual,  but  is 
imposed  primarily  to  protect  the  morals  of  the  community;  while 
the  tax  to  maintain  the  public  schools  is  paid  solely  for  the  purpose 
of  benefiting  the  general  public. 

605 


606  OUTLINES    OF   ECONOMICS 

There  are,  then,  three  general  principles  of  classification:  (a) 
the  assignability  of  the  benefit  of  the  service  to  an  individual; 
(6)  the  degree  of  compulsion  exercised  by  the  State;  (c)  the 
degree  and  kind  of  public  interest  involved  in  the  service.  The 
more  voluntary  payments  for  the  more  commercial  services  made 
by  persons  who  receive  a  special  benefit  from  these  services,  are 
called  public  prices;  the  less  voluntary  payments  for  services  in 
which  the  public  interest  is  less  commercial  in  character,  made 
by  persons  who  receive  a  special  benefit  from  the  services,  are 
called  fees.  Compulsory  contributions,  "levied  in  proportion 
to  the  special  benefits  derived,  to  defray  the  cost  of  a 
specific  improvement  to  property,  undertaken  in  the  public  in- 
terest," are,  in  the  United  States,  called  special  assessments; 
and  compulsory  contributions,  exacted  by  public  authority  ac- 
cording to  some  general  rule,  without  reference  to  the  special 
benefit  conferred  by  the  services  to  whose  maintenance  the  con- 
tributions are  devoted,  are  called  taxes. 

The  student  is  warned  that  little  regard  is  paid  to  these  distinc- 
tions in  everyday  usage.  The  words  "fees,"  "taxes,"  "licenses," 
"  tariffs,"  "  rates,"  "  charges,"  and  the  like  are  hopelessly  confused; 
and  even  the  trained  economist  finds  it  impossible  to  distinguish  with 
complete  success  between  prices,  fees,  and  some  kinds  of  taxes. 
The  utility  of  the  terms  is  in  emphasizing  the  important  truth 
that  these  great  categories  of  public  contributions  must  be  dis- 
tinguished and  differently  treated  by  the  legislator  and  student, 
by  whatever  terms  the  different  categories  are  designated. 

Fees.1  —  In  the  exercise  of  its  most  fundamental  and  general 
functions,  the  government  frequently  confers,  in  an  incidental 
way,  special  benefits  upon  particular  individuals.  Thus  the  courts, 
whose  function  it  is  to  administer  justice  in  general,  find  that  this 
function  must  be  performed  by  deciding  disputes  between  partic- 
ular litigants,  one  of  whom  usually  benefits  by  the  decision. 
Now  if  the  government  is  disposed  to  take  advantage  of  the  op- 

1  Public  prices  have  been  discussed  in  the  preceding  chapter.  The  small 
tuition  charges  paid  by  students  in  state  universities  offer  a  good  illustration  of 
fees;  they  are  non-commercial  in  character,  semi-voluntary,  and  in  amount 
fall  considerably  short  of  the  cost  of  the  service. 


PUBLIC   REVENUES  607 

portunity,  it  is  evident  that  much  revenue  may  be  raised  from  the 
individuals  who,  in  a  more  or  less  adventitious  way,  benefit  from 
the  government  activities;  and  where  the  nation  is  poor  or  the 
people  averse  to  taxation,  much  dependence  will  be  placed  upon 
fees.  As  wealth  increases,  however,  and  the  government  becomes 
more  democratic,  there  is  a  growing  disposition  to  support  general 
functions  by  general  contributions  —  taxes  —  and  the  relative 
importance  of  fees  is  likely  to  decline.  On  the  other  hand,  there 
is  no  likelihood  that  fees  will  wholly  disappear,  as  they  exercise 
a  wholesome  influence  in  preventing  waste.  Court  fees,  for 
instance,  would  probably  have  been  abolished  before  this,  if  they 
did  not  serve  to  prevent  litigous  persons  from  carrying  their 
quarrels  to  the  courts  for  settlements.  Because  of  this  restrictive 
and  economical  influence  exercised  by  fees,  they  will  undoubtedly 
retain  a  permanent  place  in  the  public  revenues  of  even  the  more 
advanced  and  democratic  states;  but  their  fiscal  importance 
will  probably  decline. 

During  the  colonial  epoch,  the  fee  system  was  much  abused  in 
America,  many  offices  being  wholly  maintained  by  fees,  which 
should  have  been  abolished  or  supported  by  taxation.  At  the 
present  time,  however,  the  evils  of  the  system  arise  not  from  the 
number  or  amount  of  fees,  but  from  their  connection  with  the  sala- 
ries of  certain  public  officials.  Many  officials  are  allowed  to  keep 
the  fees  which  they  collect  in  lieu  of  fixed  salaries,  and  this  practice 
results  in  very  serious  evils.  In  the  first  place,  some  fee-paid 
offices,  particularly  those  of  sheriff  and  register  of  deeds  in  popu- 
lous districts,  have  come  to  yield  princely  incomes,  and  the  scramble 
for  these  rich  offices  constitutes  a  prolific  source  of  political 
corruption.  In  the  second  place,  fee  payment  of  public  officials 
often  impels  them  to  an  excessive  and  pernicious  activity,  in  which 
their  own  interests  and  those  of  the  commonwealth  are  placed  in 
direct  conflict.  In  a  few  states,  for  instance,  prosecuting  at- 
torneys are  paid  so  much  per  conviction,  the  fee  increasing  with 
the  heinousness  of  the  offense,  while  in  many  cities  and  villages 
the  police  force  and  city  courts  are  supported  partially  by  fees 
and  fines.  Under  these  circumstances,  officials  bend  their  activity 
to  the  conviction  of  offenders,  not  to  the  prevention  of  crime  and 


608  OUTLINES   OF    ECONOMICS 

the  reform  of  the  criminal;  they  frequently  set  traps  for  persons 
who  are  likely  to  break  the  law,  creating  the  temptation  and  the 
opportunity  in  order  that  they  may  increase  their  emoluments. 
In  Wisconsin,  sheriffs  were  for  many  years  paid  so  much  per 
head  for  the  tramps  whom  they  fed  and  lodged.  The  system, 
as  has  been  said,  placed  a  "direct  premium  upon  vagrancy."  1 
During  the  existence  of  this  system  in  Wisconsin,  tramps  were 
"often  furnished  with  liquor,  tobacco,  and  newspapers,  to  induce 
them  to  return."  Finally,  the  fee  system  has  been  a  constant 
and  shameful  corrupter  of  justice  as  dispensed  by  justices  of  the 
peace  in  "the  people's  courts."  In  most  states  there  are  several 
justice's  courts  open  to  the  plaintiff  who  desires  to  bring  suit. 
In  consequence,  a  disgraceful  competition  springs  up,  each  justice 
endeavoring  to  swell  his  business  and  multiply  his  fees  by  con- 
stantly finding  for  the  plaintiff,  with  the  result  that  our  judicial 
system  is  thoroughly  vicious  at  the  point  where  perhaps  it  comes 
in  closest  contact  with  the  masses  of  the  people. 

The  remedy  is  in  the  substitution,  wherever  possible,  of  regular 
salaries  for  fee  stipends,  and  in  the  institution  of  methods  of 
accounting  which  will  hold  public  officials  to  strict  accountability 
for  every  fee  collected.  Fortunately,  the  movement  of  legislation, 
while  slow  and  obstinately  fought  by  the  politicians,  is  in  the 
right  direction ;  and  in  almost  every  state,  public  officials  are  befi^g 
required  to  turn  their  fees  into  the  general  treasury  and  accept 
instead  a  fixed  compensation. 

Special  Assessments.  —  Where  the  operations  of  the  govern- 
ment confer  a  special  benefit  upon  some  restricted  group  of  in- 
dividuals, those  individuals  are  often  led  to  exercise  undue  in- 
fluence upon  the  government  to  secure  that  service,  if  the  latter 
is  supported  by  appropriations  from  the  general  funds.  Jobbery 
and  graft  are  encouraged.  On  the  other  hand,  if  the  only  way 
the  group  of  individuals  can  secure  the  service  is  by  expenditure 
of  the  common  funds,  the  government  or  legislature  often  delays 
the  expenditure  unduly  for  fear  of  criticism  or  because  of  unwise 
parsimony.  Thus  in  cities  where  the  method  of  special  assess- 

1  T.  K.  Urdahl,  The  Fee  System  in  the  United  States,  p.  an,  et  passim,  from 
which  the  other  quotations  cited  in  this  section  are  taken. 


PUBLIC    REVENUES  609 

ment  is  not  used,  it  often  happens  that  the  opening  of  a  street 
is  delayed  long  after  the  time  when  it  would  be  desirable  for  the 
citizens  most  interested,  although  perhaps  the  latter  would  be 
willing  to  defray  the  cost  from  their  own  pockets,  were  this 
permitted. 

A  recognition  of  these  facts  in  recent  years  has  led  to  a  striking 
development  in  the  United  States,  of  the  benefit  principle  as  ex- 
emplified in  the  method  of  special  assessments.  The  special 
assessment  has  been  used  sporadically  in  many  countries  for 
several  centuries,  but  it  was  first  regularly  used  on  a  wide  scale 
in  the  United  States,  in  the  latter  half  of  the  nineteenth  century. 
Its  place  and  importance  among  the  regular  derivative  revenues 
is  shown  in  Table  I,  page  611,  from  which  it  appears  that  special 
assessments  aggregating  nearly  $40,000,000  were  collected  in 
1902.  This  amount  constituted  less  than  3  per  cent  of  all  the 
derivative  revenues;  but  as  the  national  government  collects  no 
special  assessments  and  Massachusetts  is  practically  the  only 
state  which  makes  use  of  the  special  assessment  in  state  finances, 
the  real  importance  of  the  special  assessment  appears  more  clearly 
from  an  examination  of  its  place  among  municipal  revenues. 
Among  cities  of  more  than  8000  inhabitants  in  1903  special  assess- 
ments constituted  nearly  8  per  cent  of  the  derivative  revenues 
and  yielded  almost  one  tenth  as  much  revenue  as  all  kinds  of 
taxation. 

The  special  assessment  has  been  approved  by  the  American 
courts  because  it  places  at  least  a  part  of  the  cost  of  the  service 
upon  the  beneficiaries  of  the  service,  a  rule  which  can  sometimes, 
but  not  often,  be  violated  without  subjecting  the  government  to 
excessive  and  corrupting  private  influence.  The  special  assess- 
ment has  appealed  to  the  people,  however,  because  it  permits 
public  improvements  to  go  ahead  at  a  pace  which  would  be  im- 
possible if  taxation  were  the  only  fund  for  defraying  the  cost  of 
the  improvements.  Needless  to  say,  the  special  assessment  has 
occasionally  stimulated  extravagance  and  premature  development. 
Thus,  in  New  Jersey,  in  the  last  quarter  of  the  nineteenth  century, 
several  large  cities  were  practically  thrown  into  bankruptcy  by 
undertaking  ambitious  public  works,  in  which  the  special  assess- 


6 10  OUTLINES   OF   ECONOMICS 

ment  played  an  important  part.  And  in  New  York,  under  the 
Tweed  regime,  the  system  of  special  assessments  furnished  an 
excuse  for  undertaking  public  works  in  which  corruption  flourished, 
and  which  probably  would  never  have  been  undertaken,  had  it 
been  known  in  the  beginning  that  their  cost  would  have  to  be 
partially  defrayed  by  taxation.  "  The  works  had  been  carried 
on  upon  a  scale  of  audacious  extravagance,  and  in  portions  of 
the  city  where  they  were  not  at  the  time  justified.  Great  avenues 
were  laid  out  and  improved  largely  for  the  purpose  of  giving  fat 
jobs  to  favorite  contractors,  and  to  provide  fine  drives  for  the 
pleasure  and  convenience  of  others  than  the  abutting  property 
owners  "  *  * 

On  the  whole,  however,  the  special  assessment  has  been  an 
unusual  success  as  a  fiscal  expedient,  and  has  proved  an  im- 
portant, if  not  an  indispensable,  factor  in  the  development  of 
American  cities.  Where  its  use  has  been  followed  by  extrava- 
gance, speculation,  or  jobbery,  these  evils  are  to  be  attributed  almost 
wholly  to  political  corruption  of  the  government,  and  only  in  a 
very  small  measure  to  the  special  assessment  itself.  Most  of  the 
evils,  moreover,  have  arisen  where  the  city  government,  or  some 
department  of  the  city  government  like  that  of  public  works,  has 
been  given  the  power  to  order  the  improvements  against  the  will 
of  the  property  owners  involved;  or  where  —  as  was  the  case  in 
the  example  cited  above  —  assessments  upon  particular  lots  were 
permitted  to  exceed  the  value  of  the  property.  Special  assess- 
ments should  not  be  levied  against  the  will  of  a  majority  of  the 
property  holders  subject  to  assessment,  except  by  a  two  thirds 
or  three  fourths  vote  of  the  city  council,  and  in  no  case  should 
the  assessment  exceed  a  small  fraction  of  the  value  of  the  property 
against  which  the  assessment  is  laid.  Where  these  rules  are 
observed,  the  special  assessment  is  unlikely  to  lead  either  to  pre- 
mature development  or  hardship  upon  the  property  holder. 

Taxes. — More  than  70  per  cent  of  all  the  public  revenues, 

and  nearly  95  per  cent  of  the  regular  derivative  revenues,  are 

obtained  from  taxes,  so  the  problems  of  taxation  are  the  most 

important  with  which  the  public  financier  has  to  deal.    These 

1  Rosewater,  Special  Assessments:  a  Study  in  Municipal  Finance. 


PUBLIC   REVENUES 


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6l2  OUTLINES   OF   ECONOMICS 

problems  are  of  two  varieties;  those  dealing  with  the  nature  of 
taxation  in  general,  and  those  dealing  with  specific  taxes.  The 
remainder  of  this  chapter  will  be  devoted  to  the  general  questions. 
Chapter  XXXV  will  be  given  over  to  the  more  specific  problems 
of  American  taxation. 

Justice  in  Taxation.  —  By  far  the  most  important  lesson  which 
the  student  of  fiscal  questions  has  to  learn  is  the  supreme  necessity 
for  tolerance  and  breadth  of  view.  The  factors  which  condition 
justice  or  make  for  equity  in  taxation  are  exceedingly  numerous; 
and  the  mistake  most  commonly  made  by  superficial  thinkers  is 
to  seize  upon  some  one  element  of  justice,  build  a  philosophy  upon 
that  alone,  and  vigorously  condemn  everything  that  does  not 
harmonize  with  their  petty  and  bigoted  little  system.  No  maxim 
less  comprehensive  than  the  greatest  good  of  the  greatest  number, 
and  no  rule  less  sweeping  than  that  of  the  general  welfare,  can 
serve  as  a  safe  guide  for  the  financier. 

1.  Some  writers  go  so  far  as  wholly  to  deny  the  right  of  the 
State  to  take  private  property  by  taxation.    These  writers  forget 
that  there  is  no  such  thing  as  absolutely  private  property.     As 
the  State  determines  what  shall  be  private  property,  so  also  it 
determines  the  conditions  of  its  existence,  and  the  most  funda- 
mental condition  of  private  property  is  the  obligation  to  con- 
tribute to  the  support  of  the  State.    The  rights  of  private  in- 
dividuals have  always  been  of  a  more  or  less  limited  nature,  and 
among  the  rights  reserved  by  the  people  in  their  organic  capacity 
will  be  found,  in  every  civilized  state,  the  right  to  take  a  portion 
of  the  wealth  produced  for  such  purposes  as  the  law-making 
power  may  deem  fit. 

2.  However,  the  State  must  exercise  this  power  over  private 
property  in  an  equitable  manner,  or  as  this  maxim  is  ordinarily 
expressed  in  the  terminology  of  constitutional  law,  taxation  must 
be  equal  and  uniform.    Thus,  for  example,  Section  i,  Article  10 
of  the  Constitution  of  West  Virginia  provides  that:    "taxation 
shall  be  equal  and  uniform  throughout  this  state,  and  all  property, 
real  and  personal,  shall  be  taxed  in  proportion  to  its  value,  to  be 
ascertained  as  directed  by  law."     Now,  if  we  examine  the  way 
in   which  these   requirements  of  equality  and  uniformity  have 


PUBLIC   REVENUES  613 

been  interpreted  in  the  administration  of  practical  justice  — 
and  it  is  the  kind  of  justice  that  will  stand  the  wear  and  tear  of 
practical  application  with  which  we  are  concerned  —  we  find 
that  equality  and  uniformity  have  come  to  mean  little  more  than 
this,  that  taxation  shall  not  be  arbitrary,  capricious,  or  plainly 
unreasonable  and  that  within  each  class  of  persons  or  object  the 
burden  shall  be  equal,  (a)  Everywhere  the  legislature  is  given 
a  wide  latitude  in  exempting  property,  so  that  institutions  and 
industries  which  are  regarded  as  of  peculiar  value  to  the  people 
may  be  encouraged  by  freedom  from  taxation.  Almost  every- 
where, poll  taxes  which  impose  an  unequal  burden  upon  the 
poor,  liquor  licenses  which  impose  unequal  obligations  upon  the 
saloon,  inheritance  and  corporation  taxes  which  single  out  partic- 
ular classes  of  society  for  unusual  taxation,  are  sustained  by  the 
courts.  Justice  in  taxation,  then,  does  not  require  rigid  equality  or 
narrow  uniformity  of  treatment,  (b)  Institutions  which  are  socially 
harmful  may  be  subject  to  peculiarly  drastic  and  oppressive 
taxation;  that  is  to  say,  justice  may  take  into  account  sumptuary 
considerations,  (c]  Old  taxes,  which  would  not  be  used  if  they 
were  not  already  intrenched  in  the  fiscal  and  social  system,  are 
permitted  to  endure;  justice  takes  cognizance  of  the  fact  that,  other 
things  being  equal,  an  old  tax  is  a  good  tax  by  very  reason  of  its 
age.  (d)  Indirect  taxes  which  weigh  more  heavily  upon  the  poor 
than  the  rich  show  no  signs  of  disappearing;  that  is  to  say, 
justice  gives  due  weight  to  the  productivity  of  a  tax,  its  cheapness 
of  collection,  and  convenience  of  payment,  and  balances  these  con- 
siderations against  factors  which  we  are  accustomed  to  regard  as 
more  fundamentally  ethical,  (e)  Taxes  may  be  employed  to  sup- 
press state  banks  of  issue,  protect  home  manufactures,  and  in 
general  to  accomplish  political  and  social  ends  other  than  the 
mere  raising  of  revenue.  Taxation  is  seldom  the  best  agent  of 
social  or  political  reform.  If  there  is  an  evil  which  needs  eradica- 
tion, the  best  way  is  to  suppress  it  directly,  if  possible,  rather  than 
discourage  it  a  little  by  general  taxation.  But  this  does  not  affect 
the  general  proposition  that  where  taxation  is  an  efficient  remedy, 
or  the  only  remedy,  justice  sanctions  its  employment.  (/)  Finally, 
it  is  plain  that,  however  we  strive,  nothing  better  than  approxi- 


614  OUTLINES   OF  ECONOMICS 

mate  justice  can  ever  be  secured  in  taxation.  A  system  that 
frankly  recognizes  this  truth  and  makes  for  rough  justice,  by  the 
imposition  of  taxes  which  are  simple,  stable,  convenient,  inex- 
pensive and  productive,  is  far  better  than  one  which  attempts  to 
secure  exact  justice  through  complex  and  delicate  schemes  of 
taxation  which  cannot  be  definitely  or  efficiently  administered. 

3.  The  theory  of  justice  most  widely  accepted  by  American 
courts  at  the  present  time  is  expressed  in  the  maxim  that  taxes 
should  be  proportioned  to  benefits  derived.    Like  other  rules  of 
justice,  this  maxim  contains  elements  of  truth  and  elements  of 
error.     It  is  a  fairly  helpful  guide,  for  instance,  in  dealing  with 
public  revenues  other  than  taxes.     Public  prices,  fees,  and  special 
assessments  should,  as  we  have  seen,  be  proportioned  to  benefits, 
unless  there  is  strong  reason  for  departing  from  the  rule.     And 
in   the   apportionment   of   taxation   among  districts   or  govern- 
mental sections,  the  rule  still  retains,  and  probably  always  will 
retain,  a  large  measure  of  validity.    Taxation,  we  say,  must  per- 
tain to  the  district  taxed,  meaning  by  this  that  under  ordinary 
circumstances  it  is  not  wise  to  tax  District  A  for  the  benefit  of 
District  B;   although  there  are  important  exceptions  to  this  rule. 
But  in  the  apportionment  of  taxes  among  the  individuals  of  a  given 
district,  the  rule  has  little  or  no  place.    This  conclusion  follows, 
if  for  no  other  reason,  from  our  definition  of  the  word  "taxes," 
which  we  confine  to  contributions  levied  without  reference  to 
special  benefits  received,  either  because  no  special  benefit  can  be 
assigned,  or  because  (as  in  the  case  of  free  schools)  we  specifically 
desire  to  lift  the  cost  of  the  service  from  the  shoulders  of  some  of 
those  who  specially  benefit  by  the  service.    Moreover,  in  general, 
it  is  impracticable  to  determine  what  proportion  of  the  general 
benefits  of  government  accrue  to  particular  individuals. 

4.  At  the  present  time  a  great  majority  of  economists  agree 
that  taxes  should  be  apportioned  according  to  "faculty"  or  ability 
to  pay.     It  must  be  confessed  that  the  rule  is  not  very  satisfactory. 
For  example,  the  faculty  principle  fails  to  explain  such  a  generally 
satisfactory  tax  as  the  inheritance  tax,1  which  is  sometimes  ad- 

1  The  attempt  is  often  made  to  justify  the  inheritance  tax  by  the  ability  theory, 
but  unsuccessfully.  See  West,  The  Inheritance  Tax,  (Revised  Edition),  pp.  205- 
208. 


PUBLIC    REVENUES  615 

justed  to  the  size  of  the  inheritance  and  the  relationship  of  the 
heir,  and  sometimes  to  the  size  of  the  estate  from  which  the  in- 
heritance is  taken,  but  never  to  the  total  property,  income,  or 
general  ability  of  the  recipient.  Moreover,  the  ability  principle 
is  not  very  precise.  No  simple  measure  of  ability  exists,  and 
many  taxes,  which  under  a  superficial  examination  seem  to  con- 
form to  the  rule,  such  as  the  general  property  or  income  tax,  are 
found  upon  closer  examination  to  violate  the  rule  in  a  thousand 
ways.  Despite  all  these  defects,  however,  the  ability  principle 
has  elements  of  great  strength.  It  satisfies  our  sense  of  justice, 
in  the  first  place,  when  explicit  reasons  cannot  be  given  for  de- 
parting from  a  general  rule;  and  it  expresses  the  ideal  towards 
which  we  strive  in  voluntary  contributions  to  the  church  or  other 
voluntary  joint  enterprises  of  a  social  nature.  In  the  second 
place,  we  can  frequently  ascertain  with  certainty  that  the  rule 
is  being  violated,  when  we  cannot  define  its  meaning  positively, 
and  hence  it  is  capable  of  practical  application  in  a  negative  way. 
We  may  therefore  accept  the  rule  in  this  sense,  that  unless  other 
treatment  is  justified  by  the  considerations  cited  in  paragraph  2, 
above,  or  by  analogous  reasons,  no  tax  which  is  plainly  dispro- 
portional  to  the  ability  of  the  contributors,  should  be  employed. 
5.  Accepting  the  ability  principle  as  the  best  simple  rule  for 
general  taxes  as  distinguished  from  the  specific  taxes  noted  in  para- 
graph 2,  we  at  once  encounter  the  difficult  question,  how  is  ability 
to  be  measured  ?  Different  writers  have  recommended  as  the  basis 
or  measure  of  ability,  income,  outgo  or  consumption,  and  property. 
A  little  consideration  will  convince  the  reader  that  each  of  these 
measures  is  marked  by  minor  defects.  The  consumption  of  the 
poor,  for  instance,  is  out  of  all  proportion  to  their  ability  to  bear 
the  burdens  of  the  state.  Property,  on  the  other  hand,  differs 
widely  in  its  productiveness,  and,  moreover,  many  persons  with 
a  little  property  have  large  incomes,  and  therefore  great  ability 
to  bear  taxation.  Incomes,  similarly,  differ  in  permanence  and 
security,  and  equal  incomes  are  called  upon  to  support  very  un- 
equal numbers  of  persons.  Fortunately,  it  is  not  imperative  in 
practice  to  make  a  decision  between  these  measures  of  ability. 
The  necessities  of  fiscal  administration  make  it  imperative  in 


616  OUTLINES   OF   ECONOMICS 

actual  practice  to  employ  all  three  bases  of  taxation.  Property, 
consumption,  and  income  are  all  employed  in  the  United  States 
at  the  present  time  and  will  unquestionably  continue  to  be  em- 
ployed for  many  generations. 

Progressive  Taxation.  —  After  we  adopt  any  concrete  measure 
of  ability,  we  soon  realize  that  it  is  only  approximately  correct, 
because  we  are  immediately  confronted  with  the  question:  Does 
ability  increase  in  direct  proportion  or  more  rapidly  than  our 
measure  of  ability;  in  other  words,  shall  taxes  be  laid  in  direct 
proportion  to  income,  property,  etc.,  or  shall  the  rate  be  increased 
as  the  amount  of  income  or  property  increases  ?  The  first  method 
is  called  proportional  taxation,  the  second  progressive  or  graduated. 
If  the  rate  diminishes  as  the  income  or  property  increases,  we 
speak  of  it  as  regressive  taxation;  and  if  the  rate  increases  faster 
than  the  income  or  property,  but  toward  a  fixed  limit  which  it 
can  never  exceed,  it  is  referred  to  as  degressive  taxation.1  The 
last  kind  of  rating  is  of  course  a  special  variety  of  progressive 
taxation,  and  usually  results  from  the  combination  of  a  nominally 
proportional  rate  with  the  exemption  of  a  fixed  sum  from  all  in- 
comes or  assessed  wealth.  The  American  property  tax  is  theo- 
retically a  degressive  tax,  though  it  is  regressive  in  practical  effect. 

From  the  theoretical  standpoint  our  real  knowledge  upon  this 
subject  is  exceedingly  unsatisfactory.  On  the  whole,  the  argu- 
ments of  those  who  approve  progressive  taxation  are  more  con- 
vincing than  those  of  its  opponents,  and  a  majority  of  economists 
at  the  present  time  agree  in  asserting  that  ability  increases  faster 
than  income,  property,  or  any  common  measure  of  ability.  If 
we  construe  ability  as  ability  to  bear  sacrifice  (as  John  Stuart 
Mill  and  some  other  authorities  do)  and  confine  our  attention 
solely  to  the  consumer,  there  can  be  no  doubt  that  progressive 
taxation  is  the  means  by  which  the  least  sacrifice  will  be  visited 
upon  the  community  as  a  whole.2  This  is  a  strong  argument 
because  one  of  the  chief  immediate  effects  of  taxation  is  to  deprive 

1  The  income  tax  of  Hesse,  German}',  begins  at  .6  per  cent  on  small  incomes 
and  approaches,  but  never  quite  reaches,  5  per  cent,  as  the  incomes  become  very 
large. 

2  See  Carver,  "Ethical  Basis  of  Distribution,"  Annals  of  the  American  Academy 
of  Political  and  Social  Science,  Vol.  VI,  pp.  79-99. 


PUBLIC   REVENUES  617 

persons  of  the  necessaries,  conveniences,  and  luxuries  of  life, 
while  the  maxim  of  the  greatest  good  to  the  greatest  number  - 
or  as  it  works  out  in  taxation,  the  least  sacrifice  to  the  least  num- 
ber —  is  one  of  the  most  widely  accepted  rules  of  social  conduct. 
Surveying  the  ability  theory  from  the  positive  standpoint  of 
ability  to  acquire  or  produce  property,  we  find  the  testimony 
almost  universal,  that  as  the  fortune  or  income  increases,  the  ability 
to  earn  or  produce  more  increases  at  an  accelerating  pace.  "It 
is  the  first  thousand  that  counts,"  in  the  language  of  the  successful 
man  who  is  telling  the  younger  generation  how  he  succeeded. 

Coming  to  the  more  concrete  and  more  practical  arguments, 
we  find  that  the  balance  of  opinion  also  inclines  to  the  side  of  those 
who  favor  progressive  taxation.  Let  us  briefly  recapitulate  these 
arguments  and  attempt  to  estimate  their  net  resultant.  Those 
who  oppose  progressive  taxation  charge  that  the  proposal  is 
socialistic,  that  it  would  discourage  the  accumulation  of  wealth, 
that  it  would  not  be  particularly  productive,  —  meaning  by  this 
that  the  element  of  progressivity  adds  little  to  what  would  be 
produced  by  a  proportional  rate,  —  that  it  would  stimulate  fraud 
and  evasion,  that  it  would  interfere  with  the  device  known  as 
"collection  at  the  source,"  and  that  finally  the  whole  principle  is 
arbitrary  and  capricious  in  the  sense  that  there  is  no  natural  limit 
to  the  increase  of  the  rate. 

To  these  charges  the  defendants  of  progressive  taxation  present 
plans  1  by  which  collection  at  the  source  and  progressive  rating 
may  be  successfully  combined  in  the  same  system;  and  reply, 
further,  that  terms  are  immaterial  and  questions  cannot  be  settled 
by  bandying  epithets  such  as  "socialistic,"  "anarchistic,"  and  the 
like;  that  every  tax  discourages  the  accumulation  of  wealth; 
that  whether  the  tax  will  be  productive  or  not,  it  will  relieve  the 
poorer  classes  to  the  extent  that  the  progressive  rates  do  actually 
fall  upon  the  rich;  that  persons  capable  of  evading  their  obliga- 
tions to  the  government  will  attempt  to  evade  proportional  taxes 
as  well  as  progressive  taxes;  and  that  all  taxation  is  more  or  less 
arbitrary,  resting  upon  the  judgment  and  common  sense  of  the 

1  Report  from  the  Select  [British]  Committee  on  Income  Tax,  1906  [365], 
pp.  iii-vii. 


618  OUTLINES   OF  ECONOMICS 

legislature.  The  exemptions  made  in  every  tax  law,  the  size  of 
license  fees  of  all  kinds,  the  rates  of  excise  and  customs  duties, 
are  all  "arbitrary"  and  unlimited  in  the  sense  that  progressive 
taxation  is  arbitrary  and  unlimited.  Finally,  the  defendant  of 
progressive  taxation  points  out  that,  owing  to  the  great  prominence 
of  indirect  taxes  in  our  revenue  system  and  the  tendency  of  as- 
sessors to  assess  large  properties  at  a  lower  proportion  of  real 
value  than  smaller  properties,  American  taxation  to-day  is  in 
practice  regressive,  and  some  progressivity  is  needed,  if  only  to 
balance  the  admitted  regressivity  of  existing  taxes. 

While  general  considerations  thus  seem  to  warrant  a  most 
persistent  effort  to  introduce  a  moderate  measure  of  progress- 
ivity into  our  direct  taxes,  the  student  is  warned  that  this  should 
not  be  done  in  any  doctrinaire  or  off-hand  fashion.  A  thousand 
considerations  of  practical  expediency  must  be  taken  into  account 
in  the  shaping  of  a  revenue  system,  and  in  the  end  we  are  more 
likely  to  attain  the  goal  which  the  advocates  of  progressive  taxa- 
tion seek  by  careful  exemptions  from  taxation,  by  special  taxes 
upon  corporations,  monopolies,  inheritances,  and  certain  forms 
of  income,  and  by  directing  expenditures  to  the  succor  of  the  weak 
and  the  equalization  of  opportunity,  than  by  the  introduction  of 
any  far-reaching  single  tax  such  as  a  progressive  income  or  prop- 
erty tax. 

No  tax  system,  then,  can  be  fairly  judged  without  reference 
to  the  character  of  expenditures.  Where  the  expenditures  are 
wasteful,  corrupt,  and  unwise,  heavy  taxation  is  a  curse,  although 
even  here  the  rational  method  of  reform  is  rather  to  root  out  the 
corruption  and  improve  the  administration,  than  to  reduce  taxa- 
tion, although  temporarily  it  may  be  wise  to  do  the  latter.  But 
where  the  expenditures  are  on  the  whole  wisely  and  beneficently 
used,  heavy  taxation  is  a  blessing.  No  country  was  ever  yet 
ruined  by  large  expenditures  of  money  by  the  public  and  for  the 
public.  The  true  theory  to  be  observed  in  levying  taxes  was 
tersely  expressed  in  the  4ist  section  of  the  constitution  adopted  by 
Pennsylvania  in  1776:  "No  public  tax,  custom  or  contribution 
shall  be  imposed  upon,  or  paid  by,  the  people  of  this  state,  except 
by  a  law  for  that  purpose;  and  before  any  law  be  made  for  raising 


PUBLIC   REVENUES  619 

it,  the  purpose  for  which  any  tax  is  to  be  raised  ought  to  appear 
clearly  to  the  legislature  to  be  of  more  service  to  the  community 
than  the  money  would  be  if  not  collected,  which  being  well  ob- 
served, taxes  can  never  be  burthens." 

The  Shifting  of  Taxes.  —  Up  to  this  point  we  have  been  speak- 
ing as  if  a  tax  must  remain  where  it  is  originally  placed.  This 
we  know  is  not  always  the  case.  Excise  taxes,  for  instance,  are 
usually  levied  with  the  expectation  that  they  will  be  passed  or 
shifted  from  the  business  man,  who  first  pays  them,  to  the  con- 
sumer or  some  other  person.  The  conditions  which  control  the 
shifting  of  taxes  must  evidently  be  considered  —  at  least  in  a  very 
general  way  —  before  we  discuss  the  practical  working  of  the 
American  system  of  taxations. 

The  word  "shifting"  usually  refers  to  the  increase  of  price  by 
which  the  original  payer  of  the  tax  attempts  to  recoup  himself. 
This  increase  of  price  is  usually  accompanied  by  collateral  economic 
disturbances  or  dislocations  —  suggested  by  the  phrase  "re- 
percussion of  taxes"  which  is  frequently  employed  in  this  con- 
nection —  that  are  quite  as  important  as  the  mere  change  in  price. 
For  instance,  an  excise  tax  (per  unit  of  product)  upon  a  monopoly 
may  raise  the  price  by  as  much  or  even  more  than  the  tax  itself. 
But  the  monopolist  nevertheless  feels  the  burden  of  the  tax  in 
reduced  profits.  When  we  say  that  a  tax  is  shifted,  then,  we  do 
not  imply  that  the  original  payer  evades  all  the  evil  effects  of  the 
tax.  And  in  any  conclusive  discussion  of  shifting,  account  should 
be  taken  of  the  incidence  or  benefit  of  governmental  expenditures. 
A  tax  system  which  bears  heavily  upon  the  poor  may  be  justified 
by  expenditures  which  are  largely  employed  to  educate  and  pro- 
vide opportunities  for  the  poor. 

Mobility  is  the  chief  factor  which  controls  shifting;  and  this 
in  turn  is  largely  dependent  upon  the  generality  or  scope  of  the 
tax,  and  upon  the  existence  of  monopoly  or  differential  advan- 
tages. Place  a  tax  upon  a  person  or  thing  which  can  easily 
move  to  a  jurisdiction  where  such  taxes  are  not  imposed,  and 
the  tax  is  very  likely  to  be  shifted.  Local  taxes  upon  mortgage 
loans  offer  a  good  example.  Such  taxes  are  very  likely  to  raise 
the  interest  rate  by  as  much  or  a  little  more  than  the  tax  rate, 


620  OUTLINES   OF  ECONOMICS 

the  "little  more"  being  explained  by  the  trouble  imposed  upon 
the  lender  in  looking  after  the  tax  and  the  risk  that  the  tax  rate 
will  be  increased.  On  the  other  hand,  if  mortgage  lenders  are 
constrained  by  ignorance  or  custom  or  the  existence  of  particu- 
larly high  rates  in  this  district  to  keep  on  supplying  the  old  amounts 
of  loans,  the  tax  will  not  be  shifted.  Unless  the  supply  can  be 
or  is  reduced  by  the  tax,  shifting  will  not  ordinarily  take  place. 

Naturally,  therefore,  the  particular  nature  of  the  supply  is  of 
prime  importance.  We  may  illustrate  by  an  excise  tax  per  unit 
of  product  upon  competitive  industries  of  various  kinds.  In 
industries  subject  to  the  law  of  constant  expense,  a  fixed  tax  per 
unit  of  product  will  raise  the  price  by  just  the  amount  of  the  tax, 
in  theory.  In  industries  subject  to  the  law  of  increasing  expense, 
however,  the  reduction  of  the  supply  caused  by  the  tax  somewhat 
reduces  the  expenses  of  production  per  unit  exclusive  of  the  tax, 
and  on  this  account  prices  in  such  industries  will  increase  by 
an  amount  less  than  the  tax.  In  industries  subject  to  the  law  of 
diminishing  expense,  on  the  other  hand,  the  price  will  be  raised 
by  an  amount  equal  to  the  tax,  plus  an  amount  equal  to  the  in- 
creased expense  of  production  caused  by  the  limitation  of  supply. 

Mobility,  as  has  been  said,  is  the  most  important  factor  in  this 
connection,  and  it  may  be  restricted  or  destroyed  in  a  variety 
of  ways.  Monopoly  limits  mobility,  and,  as  we  have  seen  in 
Chapter  XIII,1  the  monopolist  cannot  shift  a  fixed  tax  or  a  propor- 
tional tax  on  net  profits  unless  the  tax  is  so  high  as  to  reduce 
monopoly  profits  below  the  amount  that  could  be  earned  on  the 
same  investment  in  a  competitive  industry.  For  somewhat 
similar,  but  not  exactly  the  same  reasons,  differential  gains  from 
durable  property  are  peculiarly  susceptible  to  taxation.  Thus, 
economists  generally  indorse  the  proposition  that  a  tax  on  economic 
rent  falls  upon  the  landlord  and  cannot  be  shifted.  The  validity 
of  this  depends  both  upon  the  durability  of  land  and  the  fact  that 
the  tax  is  levied  upon  a  differential  element.  If  land  wore  out 
and  had  to  be  replenished,  the  tax  would  reduce  the  future  sup- 
ply of  land  and  hence  raise  its  price  and  its  rent  in  the  future. 
Similarly,  if  the  tax  were  levied  upon  the  product  of  marginal  or 

1  pp.  200,  aor. 


PUBLIC   REVENUES  621 

no-rent  land,  it  would  elevate  the  margin,  reduce  the  supply  of 
those  products  or  services  which  land  affords,  and  in  this  way 
again  raise  prices  and  partially  reimburse  the  landlord.  But, 
by  hypothesis,  neither  of  these  suppositions  are  true.  Land, 
as  we  define  it,  does  not  wear  out;  and  at  the  margin  land  yields 
no  economic  rent. 

The  proposition  that  a  tax  on  economic  rent  cannot  be  shifted 
is  true,  also,  only  of  a  proportional  tax.  A  tax  of  so  much  per 
bushel  or  pound  upon  agricultural  produce  would  move  the 
margin  of  cultivation  and  thus  affect  prices.  Indeed,  the  exact 
form  of  a  tax  —  whether  fixed,  proportional,  or  progressive,  upon 
net  or  gross  returns,  upon  product  or  upon  profit  —  is  of  funda- 
mental importance  always.  Generally  speaking,  proportional  taxes 
upon  net  income  are  less  easily  shifted  than  other  forms  of  taxes. 

If  the  object  of  taxation  be  durable  and  the  tax  a  special  or 
exclusive  one,  the  value  of  the  object  is  likely  to  be  reduced  by 
the  capitalized  value  of  the  tax.  Prospective  purchasers  of  land, 
for  instance,  always  take  into  account  the  taxes  that  are  likely 
to  be  levied  upon  it,  capitalize  these,  and  subtract  their  capitalized 
value  from  the  amount  which  they  would  pay  for  the  property 
if  it  were  not  liable  to  taxation.  The  apparent  result  of  this 
capitalization  or  amortization  of  taxes,  as  the  process  is  called,  is  to 
place  the  burden  of  an  endless  succession  of  taxes  upon  the  original 
owner,  and  relieve  subsequent  purchasers  of  any  real  burden. 

Many  present-day  followers  of  Henry  George  find  in  this  prin- 
ciple of  'amortization  at  once  a  justification  and  a  method  of 
securing  for  society  all  economic  rent.  Under  present  conditions, 
they  say,  a  man  who  buys  land  wholly  escapes  taxation  upon  it. 
Consequently,  in  order  to  make  landowners  pay  as  much  as  other 
people  we  should  have  to  increase  the  tax  upon  land  by  a  rate 
equal  to  that  paid  by  the  average  tax-payer  as  often  —  say  every 
thirty  years  —  as  the  land  of  the  community  changes  holders. 
In  this  way  the  State  could  gradually  and  with  justice  absorb  all 
economic  rent.1 

1  Sec  the  paper  upon  "The  Single  Tax"  by  C.  B.  Fillebrown  in  State  and  Local 
Taxation  (the  Addresses  and  Proceedings  of  the  First  National  Conference  of  the 
National  Tax  Association),  pp.  286-293. 


622  OUTLINES    OF   ECONOMICS 

But  this  whole  chain  of  reasoning  is  fallacious  for  three  reasons: 
(a)  This  capitalization  takes  place  only  to  the  extent  that  the 
tax  on  land  is  exclusive  and  unequal,  and  modern  taxes  upon  land 
are  not  of  this  nature.  (6)  In  so  far  as  this  programme  of  the 
single  taxers  were  anticipated  and  understood,  it  would 
visit  the  whole  burden  of  the  "reform"  upon  present  owners, 
instead  of  being  distributed  over  several  generations.  Sub- 
sequent purchasers  would  discount  these  periodic  increases  of  the 
tax  and  pay  to  owners  for  their  land  only  the  present  value  of 
the  rapidly  vanishing  income  from  land.  Land  would  be  valued 
simply  as  a  terminable  annuity,  (c)  This  whole  doctrine  over- 
looks the  inevitable  consequence  that,  if  "the  selling  value  of 
land  is  an  untaxed  value"  l  and  if  "the  burden  of  a  land  tax  can- 
not be  made  to  survive  a  change  of  ownership,"2  these  facts  would 
so  increase  the  demand  for  land  that  the  profits  from  its  purchase 
and  ownership  would  not  exceed  profits  in  other  lines  of  invest- 
ment. Given  plenty  of  time,  active  competition,  together  with 
a  knowledge  of  the  facts  of  the  situation,  and  such  inequalities 
of  taxation  are  inevitably  smoothed  out  by  the  natural  movement 
of  capital  toward  the  taxless  field  or  away  from  the  field  in  which 
burdens  are  particularly  severe. 

This  inevitable  reckoning  of  taxation  among  the  disadvantages 
of  industry,  brings  it  to  pass  that  many  old  taxes  are  diffused  over 
the  entire  community.  Such  diffusion  does  not  take  place  when 
the  nature  of  the  supply  prevents  it  from  varying  in  nice  cor- 
respondence with  the  prospects  of  profit.  A  poll  tax  upon  laborers, 
for  instance,  will  in  our  opinion  not  be  shifted,  as  it  is  likely  to 
lower  their  standard  of  living,  stimulate  the  birth  rate,  and  in  turn 
(other  things  being  equal)  actually  reduce  wages.  But  exclusive 
taxes  on  capital  and  business  will  be  diffused;  and  for  this  reason 
there  is  a  profound  practical  truth  in  the  famous  dictum  of  Canard 
that  "every  old  tax  is  good;  every  new  tax  is  bad,"  when  sympa- 
thetically interpreted.  Of  course  this  doctrine  assumes  that  in- 
dustrial changes  are  infrequent.  The  tax  system  must  and  should 

1  See  the  paper  upon  "  The  Single  Tax  "  by  C.  B.  Fillebrown  in  State  and  Local 
Taxation  (the  Addresses  and  Proceedings  of  the  First  National  Conference  of  the 
National  Tax  Association),  p.  290.  *  Ibid.,  p.  290. 


PUBLIC   REVENUES  623 

vary  with  changes  in  the  fortunes  of  business  enterprise.  The 
development  of  a  new  industry  making  unusual  and  unexpected 
profits  offers  a  good  opportunity  of  relieving  an  old  industry  that 
has  unexpectedly  fallen  upon  evil  days.  And  for  this  reason  it 
is  highly  desirable  that  state  constitutions  prescribing  a  rigidly 
uniform  system  of  taxation  should  be  amended  so  as  to  permit 
reasonable  classification  of  property  and  business  for  purposes 
of  taxation.  All  these  qualifications  of  the  diffusion  theory  are 
true  and  important.  But  the  fact  still  remains  that  under  ordinary 
conditions  nothing  is  worse  in  a  tax  system  than  uncertainty, 
continual  tinkering  with  rates,  and  capricious  readjustment  of 
methods. 

QUESTIONS    AND    EXERCISES 

1.  In  accordance  with  what  principles  of  classification  do  we  distinguish 
fees,  special  assessments,  and  taxes? 

2.  Enumerate  six  distinct  fees  commonly  employed  by  state  governments. 

3.  Can  a  fee  exceed  the  cost  of  the  service  to  the  state?     Is  the  familiar 
"high  liquor  license"  a  fee  or  a  tax? 

4.  What  accounts  for  the  rapid  development  of  the  special  assessment  in 
the  last  fifty  years?     Is  it  possible  to  apportion  the  benefits  of  a  public  im- 
provement with  any  degree  of  accuracy? 

5.  Make  a  table  from  the  Census  Volume  on  Wealth,  Debt,  and  Taxa- 
tion, showing  the  relative  importance  in  each  governmental  division,  of  the 
taxes  differentiated  in  Table  I. 

6.  Why  are  liquor  licenses  distinguished  from  other  licenses  and  permits? 

7.  Has  the  state  a  greater  right  to  tax  land  and  natural  agents  than 
wealth  which  is,  in  large  degree,  a  product  of  human  labor? 

8.  May  monopolies  be  equitably  subjected  to  special  taxation  ?     Even 
if  the  monopoly  rests  upon  superior  efficiency,  or  upon  patent  rights  justly 
acquired  ? 

9.  Is  rigid  equality  of  taxation  a  primary  and  fundamental  desideratum? 
Is  it  possible  of  achievement?     Is  there  any  real  distinction  between  the 
so-called  ethical  qualities  (of  equality,  uniformity,  etc.)  and  the  so-called  ad- 
ministrative qualities  (convenience,  elasticity,  productivity,  etc.)  of  a  tax? 

10.  Is  the  benefit  principle  wrong  or  merely  impossible  of  application? 
If  wrong,  why  do  we  retain  it  in  fees  and  special  assessments? 

n.    Is  it  easier  to  measure  ability  than  benefits? 

12.  Is  progressive  taxation  arbitrary  ?     Can  it  be  satisfactorily  considered 
apart  from  the  effect  of  public  expenditures  ? 

13.  Work  out  the  effect  of  an  excise  tax  on  a  monopoly  subject  to  the  law 
of  increasing  cost. 


624  OUTLINES   OF  ECONOMICS 

REFERENCES 

BASTABLE,  D.  F.     Public  Finance,  Book  III,  Chap.  Ill,  "The  Distribution 

of  Taxation,"  pp.  281-315;    Chap.  V,  "The  Shifting  and  Incidence  of 

Taxation,"   pp.   337-362;    Chap.   VII,   "The   Canons  of  Taxation," 

pp.  382-391. 
CARVER,  T.  N.     "Ethical  Basis  of  Distribution,"  Annals  of  the  American 

Academy  of  Political  and  Social  Science,  Vol.  VI,  pp.  79-99. 
COOLEY,  T.  M.     A  Treatise  on  the  Law  of  Taxation  (3d  ed.),  Chap.  II, 

"The  Nature  of  the  Power  to  Tax,"  pp.  43-82;   Chap.  VI,  "Equality 

and  Uniformity  in  Taxation,"  pp.  254-410. 
CROWELL,  T.  Y.  &  Co.  (Pub.).     Equitable  Taxation,  Essay  by  W.  E.  Weyl, 

pp.  17-31. 

ELY,  R.  T.     Taxation  in  American  States  and  Cities,  Part  I,  Chap.  III. 
GRAY,    J.    M.    Limitation    of    Taxing    Power    on     Public    Indebtedness, 

"Equality    and    Uniformity,"    Chaps.   XVIII-XXIV,    pp.    642-915; 

"The  Origin  and  Growth  of  Modern  Taxation,"  pp.  25-54. 
JUDSON,  F.  N.     A  Treatise  on  the  Pou'er  of  Taxation,  passim. 
ROSEWATER,  VICTOR.     Special  Assessments:  a  Study  in  Municipal  Finance, 

passim.     Studies  in  History,  Economics,  and    Public  Law,   Columbia 

University,  Vol  II,  No.  3. 
SELIGMAN,  E.  R.  A.     The  Shifting  and  Incidence  of  Taxation,  Part  II, 

Chap.  I,  "General  Principles,"  pp.  179-219. 
SELIGMAN,  E.  R.  A.     Progressive  Taxation  in  Theory  and  Practice,  Part  II, 

Chap.  IV,  "Conclusion,"  pp.  190-200;    Part  III,  "Application  of  the 

Progressive  Principle  to  American  Taxation."  pp.  201-217. 
National  Tax  Association.   State  and  Local  Taxation  [Addresses  and  Proceed- 
ings of  the  First  National  Conference]. 
URDAHL,  T.  K.     The  Fee  System  in  the  United  States,  Chap  I,  pp.  49-67; 

Chap.  VIII,  pp.  210-230.     Transactions  of  the  Wisconsin  Academy  of 

Science,  Arts,  and  Letters,  Vol.  XII,  Part  I. 
WESTON,   S.   F.     Principles  of  Justice  in   Taxation,   passim.     Studies  in 

History,  Economics,  and  Public  Law,  Columbia  University,  Vol.   17, 

No.  a. 


CHAPTER  XXXV 

PUBLIC  REVENUES;  FEDERAL,   STATE,  AND  LOCAL 
TAXES 

FEDERAL  TAXATION 

Direct  and  Indirect  Taxes.  —  The  fundamental  character  of  the 
American  revenue  system  is  determined  by  those  clauses  of  the 
federal  Constitution  which  provide  that  "direct  taxes  shall  be 
apportioned  among  the  several  states  .  .  .  according  to  their 
respective  numbers";  that  "all  duties,  imposts,  and  excises  shall 
be  uniform  throughout  the  United  States";  and  that  "no  state 
shall,  without  the  consent  of  Congress,  levy  any  imposts  or  duties 
on  imports  or  exports,  except  what  may  be  absolutely  necessary 
for  executing  its  inspection  laws." 

Just  what  the  words  duties,  imposts,  excises,  direct  and  in- 
direct taxes  signify,  as  used  in  the  Constitution,  has  been  a  matter 
of  considerable  discussion.  Ordinarily  the  word  duty  "means  an 
indirect  tax  imposed  upon  the  importation,  exportation,  or  con- 
sumption of  goods,"  being  given  "a  broader  meaning  than  cus- 
tom, which  is  a  duty  imposed  upon  imports  or  exports,"  while 
"the  term  impost  also  signifies  any  tax,  tribute,  or  duty,  but  it 
seldom  applied  to  any  but  indirect  taxes.  An  excise  duty  is  an 
inland  impost  levied  upon  articles  of  manufacture  or  sale,  and 
also  upon  licenses  to  pursue  certain  trades  or  to  deal  in  certain 
commodities." 

But  all  these  definitions  are  made  to  hinge  upon  the  meaning 
of  direct  and  indirect  taxes,  and  that  meaning  is  exceedingly 
doubtful.  Until  1894,  it  was  believed  by  most  persons  that  as 
used  in  the  Constitution  of  the  United  States,  these  terms  were 
to  be  given  an  historical  interpretation,  to  be  accepted  as  used 
in  1789,  and  that  in  this  interpretation  capitation  and  land  taxes 

2S  625 


626  OUTLINES  OF  ECONOMICS 

were  probably  the  only  forms  of  direct  taxes.  This  belief  was 
sustained  by  the  fact  that  the  Federal  Supreme  Court  at  various 
times  sanctioned  the  employment  by  Congress  of  income,  inherit- 
ance, and  special  property  or  consumption  taxes.  But  in  the 
income  tax  decision  of  1894  the  Supreme  Court  reversed  its 
earlier  decisions,  declared  the  income  tax  to  be  "direct,"  and 
interpreted  the  words  direct  and  indirect  in  accordance  with  the 
economic  rather  than  the  historical  or  legal  use  of  those  terms. 
According  to  most  economists,  direct  taxes  are  taxes  levied  by  the 
State  upon  those  who  are  expected  to  bear  the  burden  of  them,  while 
indirect  taxes  are  supposed  to  be  shifted  to  other  persons.  In  the 
economic  sense,  poll  taxes,  property,  income,  and  inheritance 
taxes  are  usually  called  direct,  while  customs  taxes  and  excise 
taxes  are  called  indirect. 

It  is  plain  that  the  economic  meaning  of  these  words  is  exceed- 
ingly vague,  because  it  is  made  to  turn  upon  the  expectation  of 
the  user  concerning  the  shifting  of  the  tax,  and  upon  no  subject 
in  the  entire  province  of  political  economy  is  there  more  uncer- 
tainty than  upon  the  shifting  of  taxes.  Because  of  this  uncer- 
tainty, economists  have  for  years  protested  against  the  use  of 
these  terms  at  all  in  scientific  analysis,  although  they  have  tried 
to  introduce  a  more  consistent  usage,  owing  to  their  constant 
employment  in  popular  discussion.  Under  these  circumstances, 
it  was  exceedingly  unfortunate  that  the  Supreme  Court  turned 
away  from  the  legal  interpretation  of  the  words.  When  the 
latter  were  placed  in  the  Constitution,  they  probably  had  no  defi- 
nite or  accepted  meaning;  they  had  no  definite  or  accepted 
meaning  as  used  later  by  economists  or  publicists ;  and  the  only 
way  they  could  attain  precision  was  by  legal  interpretation. 
After  a  number  of  consistent  opinions  which  gave  the  words  a 
definite  connotation  and  promised  to  clear  up  a  difficult  situa- 
tion once  for  all,  the  Supreme  Court  threw  everything  into  chaos 
again  by  revising  opinions  which  had  stood  unchanged  for  many 
years. 

Use  of  Direct  Taxes  by  the  Federal  Government.  — The  effect 
of  the  constitutional  provisions  which  we  have  been  discussing 
has  been  to  concentrate  federal  taxation  almost  wholly  upon  con- 


PUBLIC   REVENUES  62; 

sumption,  since  direct  taxes  when  apportioned  according  to 
population  have  shown  themselves  to  be  unjust,  unproductive, 
and  exceedingly  difficult  of  collection.  Congress  has  made  use 
of  direct  taxes  only  five  times  during  the  history  of  the  national 
government.  Two  million  dollars  was  apportioned  in  1798; 
$3,000,000  in  1813;  $6,000,000  in  1815;  $3,000,000  in  1816; 
and  $20,000,000  in  1861.  Except  in  the  tax  of  1798,  Congress 
has  always  permitted  any  state  to  assume  its  quota  and  raise 
the  money  as  it  saw  fit,  although  provision  was  always  made  for 
the  collection  of  the  amount  —  usually  by  taxes  on  lands,  houses, 
and  slaves  —  by  federal  officers,  in  case  the  quota  was  not  as- 
sumed by  the  state  government.  It  would  be  difficult  to  exag- 
gerate the  unsatisfactory  character  of  such  taxation.  In  no  case 
has  the  federal  government  ever  collected  the  full  amount  of  the 
tax.  The  taxes  levied  in  1814-1816  continued  to  be  collected 
until  1839.  The  last  payments  on  the  direct  tax  of  1861  were 
not  received  until  1888;  and  in  1891  a  law  was  passed  abolishing 
further  collections  and  authorizing  the  amounts  which  had  been 
collected  under  the  act  of  1861  to  be  returned.  Considerable 
scandal  arose  out  of  this  refunding  act  owing  to  the  enormous 
commissions  paid  to  certain  lobbyists  for  their  work  at  Washing- 
ton in  securing  the  passage  of  the  law.  Experience  has  thus 
made  it  amply  clear  that  the  federal  government  must  put  its 
dependence  upon  customs  duties,  excises,  and  similar  taxes. 

Customs  Duties.  —  Among  federal  revenues,  customs  duties 
easily  occupy  the  place  of  first  importance.  From  the  founda- 
tion of  the  federal  government  in  1789  until  the  Civil  War,  with 
the  exception  of  a  few  excise  taxes  collected  between  1791  and 
1802,  the  federal  government  derived  nearly  all  its  permanent 
regular  revenues  from  customs  taxation,  and  since  the  Civil  War 
considerably  more  than  50  per  cent  of  the  permanent  revenue 
has,  on  the  average,  been  derived  from  this  source.  From  the 
very  beginning,  moreover,  our  customs  duties  have  been  in  spirit, 
if  not  in  effect,  protective;  and  it  thus  becomes  necessary  to 
consider  the  connection  between  the  protective  and  revenue 
principles,  in  addition  to  the  more  strictly  fiscal  aspects  of  customs 
duties. 


628  OUTLINES   OF   ECONOMICS 

Protective  duties  are  imposed  in  the  hope  of  diminishing  im- 
ports and  substituting  in  their  stead  the  products  of  home  manu- 
facturers. To  the  extent,  therefore,  that  they  are  successful  in 
their  purpose,  they  reduce  the  customs  revenues  and  justify  the 
statement  that  there  is  a  fundamental  antagonism  between  the 
protective  and  revenue  principles.  However,  the  reduction  of 
importation  does  not  signify  that  the  consumers  of  the  article  in 
question  are  not  taxed.  So  long  as  the  price  remains  higher  than 
it  would  be  if  no  duty  were  imposed,  the  people  are  taxed  to  the 
extent  of  the  difference,  the  proceeds  of  the  tax  going  to  home 
manufacturers  in  the  form  of  an  unmeasured,  unregulated  bounty, 
whose  burden  upon  the  taxpayers  is  no  less  real  because  unper- 
ceived. 

It  is  equally  evident  that  no  protection  is  given  unless  the  price 
is  raised.  The  popularity  of  customs  duties  is  largely  explained 
by  the  belief  that  the  foreigner  can  be  made  to  bear  the  burden 
of  the  tax.  He  can  in  some  cases,  but  not  in  the  majority  of 
cases.  For  the  most  part  it  is  believed  that  the  burden  must  be 
borne  by  the  home  consumer.  But  whatever  the  extent  to  which 
the  foreigner  can  be  made  to  pay  the  tax,  to  that  extent  the  tariff 
fails  to  replace  foreign  by  home  products;  in  short,  fails  to  "pro- 
tect." We  cannot  save  our  cake  and  eat  it.  The  more  the 
protection  or  bounty  to  the  home  manufacturers,  the  greater  the 
tax  upon  the  consumers,  the  less  the  shifting  of  the  tax  to  the 
foreigner,  and  the  less  the  revenue  to  the  home  government. 
The  protectionist  is  logically  deprived  of  the  time-worn  argument 
that  the  foreigner  foots  the  bill. 

The  shifting  of  import  duties  may  be  best  explained  by  noticing  separately 
the  immediate  and  ultimate  incidence,  (i)  The  immediate  effect  of  the  tax 
will  be  to  discourage  certain  foreign  producers  from  shipping  their  products 
to  the  newly  restricted  market,  and  prices  will  tend  to  rise  because  of  dimin- 
ished supply.  If  the  product  is  controlled  by  a  foreign  monopoly,  the 
price  may  not  increase;  but  where  the  foreign  production  takes  place  under 
competitive  conditions,  and  in  most  cases  where  the  production  is  monopo- 
lized, the  price  will  be  raised.  The  increase  of  price  may  be  more  or  less  or 
exactly  equal  to  the  tax  according  to  the  readiness  with  which  foreign  pro- 
ducers find  a  new  market,  but  in  a  large  majority  of  cases  the  burden  of 
the  tax  will  be  shared  by  the  producer  and  consumer,  the  latter  — •  according 


PUBLIC   REVENUES  629 

to  the  majority  of  authorities  —  bearing  most  of  the  burden.  That  the 
burden,  however,  is  partially  borne  by  the  foreign  producer  accords  not  only 
with  the  best  theory,  but  with  the  great  interest  displayed  by  exporters  every- 
where in  the  tariff  legislation  of  foreign  countries,  and  the  sacrifices  which 
protectionist  governments  are  willing  to  make  in  reciprocity  treaties  for  the 
purpose  of  obtaining  advantageous  terms  for  their  own  producers. 

(2)  Eventually,  however,  the  initial  increase  in  price  may  stimulate  home 
production,  and  this  can  only  take  place  when  the  increase  of  price  is  less 
than  the  duty,  because  if  the  price  rises  by  the  whole  amount  of  the  tax,  the 
foreigner  will  still  possess  his  initial  advantage.  If  the  home  producer  totally 
ousts  the  foreigner,  then  the  consumer  bears  all  the  difference  between  the 
existing  price  and  the  price  that  would  rule  if  no  duty  were  imposed  — 
although,  of  course,  the  treasury  receives  nothing.  If  the  home  producer 
secures  only  a  part  of  the  home  market,  it  is  plain  that,  under  ordinary 
circumstances,  the  foreigner  pays  part  of  the  tax,  i.e.  the  amount  per  unit 
of  product  by  which  the  duty  exceeds  the  increase  of  price;  whilst,  as  before, 
the  home  consumer  pays,  on  every  unit  consumed,  a  tax  equal  to  the  differ- 
ence between  the  old  and  the  new  prices.  When,  however,  we  attempt  to 
go  further  and  take  account  of  the  indirect  effects  of  protection,  the  problem 
becomes  almost  hopelessly  complex.  Modern  economists,  however,  are 
substantially  agreed  that  the  foreign  producer  bears  a  much  larger  share  of 
the  average  customs  duty  than  the  English  economists  of  the  first  half  of  the 
nineteenth  century  were  willing  to  admit. 

From  the  standpoint  of  revenue,  American  customs  duties 
have  the  great  virtues  of  high  productivity,  convenience  of  pay- 
ment, and  cheapness  of  collection.  Along  with  these  important 
virtues  are  associated  almost  all  the  vices  to  which  indirect  taxes 
are  subject,  (a)  The  most  important  defects  of  our  customs 
taxes  are  their  unreliability  and  uncertainty.  Historically,  they 
have  shown  a  pernicious  variability,  expanding  when  increased 
revenue  spelt  extravagance,  contracting  when  the  country  sorely 
needed  larger  revenue.  In  1791,  for  instance,  the  customs 
revenue  exceeded  the  total  ordinary  expenditures  by  over  41  per 
cent,  while  in  the  very  next  year  they  fell  short  of  the  expenditures 
by  58  per  cent.  Between  1791  and  1860  inclusive,  the  customs 
receipts  actually  exceeded  the  expenditures  in  thirty-four  years; 
varied  between  50  and  100  per  cent  of  the  expenditures  in  twenty- 
eight  years;  and  fell  below  50  per  cent  in  eight  years.  In  1860, 
more  than  84  per  cent  of  the  expenditures  were  secured  from 
this  source,  but  in  1863  less  than  10  per  cent,  so  inadequate  is 


630  OUTLINES   OF  ECONOMICS 

the  customs  revenue  in  a  serious  war  when  money  is  most  needed. 
In  1864,  Congress  made  desperate  attempts  to  increase  its  cus- 
toms revenue.  In  the  tariff  act  of  that  year  about  fifteen  hun- 
dred articles  were  enumerated,  and  the  average  rate  approxi- 
mated 50  per  cent;  yet  the  receipts  dropped  from  something 
over  one  hundred  and  two  millions  in  1864  to  less  than  eighty- 
five  millions  in  1865,  constituting  only  6.5  per  cent  of  the  total 
expenditures  in  the  latter  year.  During  the  history  of  the  national 
government,  the  customs  revenues  have  varied  with  the  industrial 
condition  of  the  country,  the  prospects  of  peace  or  war,  the  power 
of  the  tariff  lobby,  the  prosperity  and  commercial  policy  of  foreign 
nations,  but  almost  never  in  nice  accordance  with  the  financial 
needs  of  the  federal  government.  Where  the  tariff  is  controlled 
by  revenue  rather  than  protective  purposes,  it  can  be  made  strik- 
ingly stable  and  responsive  to  the  control  of  the  treasury.  "  The 
English  revenue  from  this  source  has  kept  very  near  ^20,000,000 
per  annum  for  the  last  thirty  years.  In  the  period  1815-1895, 
it  has  only  varied  between  ^24,000,000  and  £1 9,000,000,  not- 
withstanding the  extensive  remissions  of  taxation."  i 

(b)  From  the  fiscal  standpoint,  our  tariff  system  is  far  too  com- 
plex and  cumbersome.  Whether  we  tax  many  imports  or  few, 
the  major  part  of  the  revenue  comes  from  comparatively  few 
imports,  so  that  by  extending  the  list  of  dutiable  articles  we 
merely  add  to  the  cost  of  collection  and  increase  the  interference 
with  commerce,  without  materially  augmenting  the  yield  of  the 
tax.  Great  Britain  taxes  less  than  fifty  articles,  and  nearly  all 
of  her  revenue  from  import  taxation  comes  from  five  articles, 
tobacco,  tea,  spirits,  wine,  and  sugar.  Compared  with  direct 
taxes  the  cost  of  collecting  our  import  duties  is  not  high  (2.55  per 
cent  of  the  receipts  in  1907),  yet  it  exceeds  the  cost  of  collecting 
the  internal  revenue  duties  (1.72  per  cent  in  1907);  and  in  some 
customs  districts  the  expenses  of  collecting  actually  exceed  the 
tax  collected.  In  fact,  the  administration  of  the  entire  system 
is  cumbersome,  inquisitorial,  and  irritating. 

"There  is  no  better  illustration  of  a  complex  and  incomprehensible 
revenue  system  than  the  tariff  legislation  of  the  United  States.  It  levies 

1  Bastable,  Public  Finance,  p.  517  (written  in  1895). 


PUBLIC   REVENUES  631 

import  duties  upon  goods  that  make  up  the  country's  exports  as  well  as  upon 
those  that  constitute  the  normal  imports  of  the  nation's  commerce;  it  taxes 
raw  material  as  well  as  the  manufactured  product,  and  the  manufactured 
product  itself  is  taxed  at  many  stages  in  the  process  of  its  manufacture;  the 
rate  imposed  is  determined  in  part  by  considerations  of  revenue,  in  part  by 
the  desire  to  grant  'incidental  protection,'  and  in  part  for  the  purpose  of 
prohibiting  the  import  of  selected  articles;  the  rules  of  rating  are  numerous, 
overlapping  each  other  in  many  cases  and  resulting  in  a  confusion  of  instruc- 
tions that  necessitates  a  board  of  appeal  in  continuous  session;  the  text  of 
the  law  makes  a  book  of  one  hundred  and  fifty  pages,  while  the  law  and  its 
interpretation  used  by  the  officials  as  a  guide  in  the  performance  of  their 
duty  is  a  volume  of  several  hundred  pages.  A  law  of  this  sort  cannot  be 
comprehended."  l 

Customs  duties  are  either  specific  or  ad  valorem.  Specific 
duties  are  laid  in  proportion  to  weight  or  number,  without  regard 
to  value,  while  ad  valorem  duties  are  levied  in  proportion  to  the 
value  of  the  commodities  imported.  Ad  valorem  duties  are  open 
to  the  objection  that  they  offer  a  greater  temptation  to  fraudulent 
valuations,  and  hence  make  more  difficult  the  work  of  the  cus- 
toms officers.  Specific  duties,  on  the  other  hand,  while  they 
can  be  more  easily  administered,  are  open  to  the  serious  objec- 
tion that  they  impose  a  relatively  heavier  burden  upon  less  valu- 
able goods  of  any  class.  Owing  to  their  greater  ease  of  collec- 
tion, however,  such  specific  duties  now  play  a  larger  part  than 
ever  before  in  our  tariff  system. 

Internal  Revenue  Duties.  —  Second  in  importance  to  cus- 
toms duties  are  the  internal  revenue  duties,  which  consist  for 
the  most  part  of  excises.  Excise  taxes  are  usually  paid  by  stamps 
placed  upon  the  package  of  sale,  although  both  in  England  and 
the  United  States  the  tax  upon  the  commodity  is  supplemented 
by  license  duties  upon  dealers,  which  are  also  paid  by  stamps 
publicly  exposed  by  the  dealer  in  his  place  of  business.  In  1907 
the  internal  revenue  duties  yielded  $269,666,772,  more  than  80 
per  cent  as  much  as  the  customs  receipts,  of  which  58  per  cent 
came  from  the  tax  on  spirits,  19  per  cent  from  the  tax  on  tobacco, 
22  per  cent  from  the  tax  on  fermented  liquors,  and  the  remainder 
from  the  tax  on  oleomargarine,  playing  cards,  back  taxes  of  a 
miscellaneous  character,  and  penalties. 

1  H.  C.  Adams,  Science  of  Finance,  pp.  409-410. 


632  OUTLINES   OF  ECONOMICS 

Excise  taxes,  like  all  taxes,  have  their  grave  defects,  (a)  Like 
import  duties,  they  must  be  levied  upon  articles  of  wide  con- 
sumption to  be  productive;  and  as  they  are  in  a  large  degree 
shifted  to  the  consumers,  they  frequently  weigh  more  heavily 
upon  the  poor  than  upon  the  rich,  (b)  This  regressivity  is  in- 
creased by  the  fact  that  the  taxes  are  specific,  not  ad  valorem, 
so  that  the  finer  grades  of  domestic  cigars,  for  instance,  pay  a 
Ipwer  rate  of  taxation  than  the  cheaper  goods,  (c)  In  order  to 
prevent  evasion  of  the  tax,  the  government  is  compelled  not  only 
to  watch,  but  partially  to  direct,  the  process  of  manufacturing 
at  every  step.  Producers  are  required  to  give  bond  for  the 
faithful  observance  of  the  law,  to  register  raw  materials  which 
they  buy,  and  to  keep  records  of  the  stock  on  hand  in  accord- 
ance with  book-keeping  methods  prescribed  for  them  by  the 
Internal  Revenue  Bureau.  Such  interference  with  private  in- 
dustry is  an  unfortunate  but  necessary  part  of  excise  taxation. 
(d)  Large  systematized  businesses  bear  such  interference  with 
less  effort  than  small  concerns,  and  in  consequence  our  internal 
revenue  system  unquestionably  exerts  an  influence  in  the  direc- 
tion of  large-scale  production,  and  possibly  in  the  direction  of 
monopoly.  The  license  taxes  particularly,  which  are  adjusted 
only  in  the  roughest  way  to  the  size  of  the  business,  unquestion- 
ably weigh  more  heavily  upon  the  small  than  the  large  dealers. 
(c)  Finally,  it  seems  to  be  the  almost  universal  opinion  of  com- 
petent students  that  excise  taxes  exercise  little  influence  upon 
the  consumption  of  articles  whose  use  is  believed  to  be  deleterious. 
An  increased  tax  is  as  often  followed  by  adulteration  as  by  an 
increase  of  the  price  per  unit. 

The  advantages  of  the  internal  revenue  duties,  however,  far 
outweigh  their  defects,  (a)  Like  the  customs  duties,  they  yield 
an  enormous  revenue;  but  although  they  do  fall  off  somewhat 
in  times  of  industrial  depression,  they  are  in  ordinary  periods 
regular  and  dependable,  whilst  in  times  of  war  they  respond 
readily  to  increased  rates.  The  increase  of  old  duties  and  the 
imposition  of  new  duties  during  the  Spanish  War,  for  instance, 
raised  the  receipts  from  $170,900,641  in  1898  to  $273,437,162  in 
1899.  Many  of  the  taxes  yield  a  proportional  increase  almost  as 


PUBLIC   REVENUES  633 

great  as  the  increase  in  the  rate  of  the  tax,  a  rare  virtue  in  excise 
taxation,  as  the  rise  of  the  burden  usually  cuts  down  the  consump- 
tion, (b)  From  the  administrative  standpoint  they  are  very  in- 
expensive to  collect,  give  rise  to  comparatively  little  fraud  or 
evasion,  and  the  few  industries  which  they  affect  have  now  be- 
come so  habituated  to  public  inspection  and  control  that  the 
latter  occasion  little  complaint,  (c)  Finally,  it  is  to  be  noted 
that  although  excise  taxes  are  regressive,  the  burden  of  the  tax 
is  shared  by  producer  and  consumer  —  not  borne  wholly  by  the 
latter  —  and  the  share  borne  by  the  producer  varies  directly  with 
the  element  of  monopoly  or  differential  advantage  in  production. 
"Viewed  as  a  whole,  the  internal  revenue  system  is  the  most 
satisfactory  part  of  our  entire  financial  structure,  state  or  federal. 
Its  returns  are  fairly  steady  and  reliable  in  times  of  depression. 
Its  growth  is  automatic.  It  is  imposed  on  articles  the  demand 
for  which  is  tolerably  inelastic.  Its  burden  is  not  perceptibly 
felt.  It  is  honestly  and  economically  collected ;  and  finally,  it  is 
abundantly  capable  of  yielding  additional  revenue,  should  an 
unforeseen  emergency  arise."  1 

Taxes  on  Transactions.  —  In  times  of  urgent  need,  as  in  the 
War  of  1812,  the  Civil  War,  and  the  late  war  with  Spain,  the 
federal  government  has  imposed  taxes  upon  various  sorts  of 
transactions.  Thus,  the  war  revenue  act  of  1898  imposed  stamp 
taxes  on  bank  checks,  telegrams,  freight  and  express  receipts, 
transfers  of  stocks  and  bonds,  bills  of  exchange,  etc.  In  1899, 
the  year  after  they  were  imposed,  the  stamp  taxes  yielded 
$43,837,819.  The  peculiar  advantage  of  taxes  on  transactions 
is  their  quality  of  immediate  productivity.  As  the  figures  just 
quoted  show,  they  may  be  made  to  yield  largely  the  very  yeai 
they  are  imposed.  Moreover,  the  government  may  make  evasion 
almost  impossible  by  lessening  the  legal  protection  and  signifi- 
cance afforded  by  the  documents  not  properly  stamped.  An- 
other advantage  is  that  they  cost  almost  nothing  to  collect,  as  the 
taxpayer  buys  the  stamp  himself  and  places  it  upon  the  docu- 
ment. On  the  other  hand,  the  general  effect  of  such  taxes  is  to 
impede  business ;  and  a  check  on  business  activity  soon  lessens 
the  revenue  from  other  sources. 

1  Daniels,  Public  Finance,  p.  148. 


634  OUTLINES   OF  ECONOMICS 

Income  Taxes.  —  What  shall  be  done  to  remedy  the  inelasticity 
and  regressivity  of  federal  taxation?  The  remedy  most  fre- 
quently advocated  is  that  of  a  progressive  income  tax.  Income 
taxes  are  not  new  in  the  United  States.  All  through  the  colonial 
epoch  earnings  or  produce  taxes,  i.e.  taxes  upon  special  forms  of 
income,  were  common ;  between  the  Revolutionary  War  and 
1870,  particularly  after  1840,  many  trials  of  a  general  income 
tax  were  made  by  the  state  governments;  and  in  1863,  the  federal 
government  levied  a  general  income  tax,  which  was  retained  for 
about  ten  years.  In  1894,  the  federal  government  again  levied 
an  income  tax  of  two  per  cent  upon  incomes  in  excess  of  $4000, 
but  the  constitutionality  of  the  act  was  promptly  assailed,  and 
the  Supreme  Court,  by  a  majority  of  one,  and  after  a  change  in 
the  personnel  of  the  court  during  the  consideration  of  the  case, 
reversed  the  earlier  findings  and  held  that  the  income  tax  could 
be  levied  only  as  a  direct  tax  apportioned  among  the  several 
states  in  accordance  with  their  population.  An  apportioned  in- 
come tax  would  be  so  obviously  unjust  that  no  one  advocates  its 
adoption.  But  President  Roosevelt  has  recently  recommended 
the  income  tax  to  the  consideration  of  Congress  and  the  American 
people,  intimating  rather  broadly  that  a  reasonable  and  judicially 
framed  income  tax  might,  if  presented  to  the  Supreme  Court 
again,  receive  a  more  friendly  interpretation. 

The  income  tax  as  employed  by  the  state  governments  has 
been  a  consistent  and  admitted  failure,  owing,  it  is  stated  by  most 
authorities,  to  the  inability  of  assessors  to  tax  income  at  source 
and  the  consequent  employment  of  self-assessment.  John  Smith, 
living  in  Massachusetts,  receives  his  income  from  a  mining  com- 
pany situated  in  Colorado;  and  as  the  Massachusetts  assessors 
have  no  means  of  ascertaining  Smith's  ownership  of  the  mining 
stock,  they  are  forced  to  depend  upon  his  answer  in  declaring 
the  amount  of  his  income.  Yet  it  should  be  noted  that  the  suc- 
cessful German  income  taxes  are  State  taxes,  resting  largely  upon 
declarations  of  the  taxpayer  and  making  comparatively  little  use 
of  collection  at  the  source.  The  success  of  these  taxes  in  Ger- 
many is  probably  due  to  the  fact  that  the  rate  is  low,  and  the 
people  law-abiding,  even  in  matters  of  taxation. 


PUBLIC   REVENUES  635 

A  national  income  tax  has  many  points  of  strength,  (a)  First 
of  all  it  is  to  be  noted  that  in  England  and  Italy,  in  which  the  in- 
come tax  has  been  given  a  trial,  experience  has  justified  this  form 
of  taxation,  according  to  the  majority  opinion  of  those  who  have 
considered  the  matter.1  (6)  Moreover,  it  is  especially  noteworthy 
that  income  taxation  gains  in  economy  and  productiveness,  and 
wins  increasing  approbation  as  the  years  go  by.  This  is  in  sharp 
contrast  with  the  experience  of  our  states  in  their  use  of  the 
general  property  tax,  which  has  grown  more  unjust  and  less 
workable,  the  longer  it  has  been  tried,  (c)  In  the  third  place, 
income  is  as  good,  and  perhaps  better,  than  any  other  single 
measure  of  ability;  so  that  income  taxation  seems  to  be  peculiarly 
consistent  with  the  ethical  ideal  that  taxation  should  be  in  accord- 
ance with  ability.  (</)  Similarly,  there  is  perhaps  no  general  or 
universal  tax  which,  if  properly  enforced,  would  give  less  trouble 
because  of  shifting,  (e)  Most  important  of  all  from  the  fiscal 
standpoint  is  its  admirable  elasticity.  It  acts,  or  may  be  made 
to  act,  as  the  regulator  of  the  entire  revenue  system.  In  times  of 
prosperity,  when  consumption  taxes  are  productive,  a  simple 
reduction  of  the  rate  prevents  the  accumulation  of  a  harmful 
surplus.  In  times  of  stress,  the  revenues  may  be  increased  with 
the  minimum  disturbance  of  industry  and  capital  by  a  simple 
increase  of  the  rate.  There  can  be  no  doubt  that  our  federal 
revenue  system  needs  a  direct  tax  of  such  a  kind  as  to  exercise 
a  minimum  disturbing  force  upon  industry,  in  order  to  keep  a 
wholesome  balance  between  receipts  and  expenditures. 

The  disadvantages  of  a  general  income  tax,  however,  are  great. 

(a)  Its  inquisitorial  features  are  a  fertile  source  of  weakness.     In 
our  opinion,  people  should  not  resent  taxation  simply  because  it 
is  inquisitorial;    but  if  they  do  vigorously  resent  it,  the  fact  con- 
stitutes an  element  of  weakness  in  the  tax  which  we  must  take 
into  account,  whether  we  sympathize  with  the  feeling  or  not. 

(b)  The  chief  objections  to  the  income  tax,  however,  have  to  do 
with   its   practicability.    The   federal   income   tax  of   1894,   for 
example,  contained  the  following  provisions,  each  of  which,  the 

1  In  France,  also,  there  has  for  some  years  been  an  active  agitation  for  a  pro- 
gressive income  tax. 


636  OUTLINES   OF  ECONOMICS 

reader  will  note,  raises  problems  that  either  cause  injustice  or 
make  room  for  evasion  and  escape,  whichever  way  they  are 
solved.  In  estimating  the  incomes  of  persons,  assessors  were 
directed  to  include:  profits  realized  within  the  year  from  the 
sales  of  real  estate  purchased  within  the  two  years  preceding, 
interest  received  or  accrued  upon  all  notes,  bonds,1  mortgages,  or 
other  forms  of  indebtedness;  the  amount  of  all  premiums  on 
bonds,  notes,  or  coupons ;  money,  and  the  value  of  all  personal 
property  acquired  by  gift  or  inheritance.  On  the  other  hand, 
assessors  were  instructed  to  allow  taxpayers  to  deduct  necessary 
expenses  actually  incurred  in  carrying  on  any  business,  occupa- 
tion, or  profession;  interest  due  or  paid  out;  taxes  actually  paid; 
losses  actually  sustained  from  fires,  storms,  or  shipwreck  and  not 
compensated  for  by  insurance  or  otherwise;  and  debts  ascer- 
tained to  be  worthless.  What  check  had  the  assessor  upon  the 
interest  received  on  notes,  bonds,  and  other  forms  of  indebtedness? 
How  could  he  ascertain  the  profits  realized  upon  sales  of  real 
estate  ?  Similar  openings  for  an  indefinite  amount  of  fraud  were 
given  in  the  permission  to  deduct  "necessary  expenses,"  "interest 
due,"  "losses  sustained,"  and  "debts  ascertained  to  be  worth- 
less." On  the  other  hand,  corporations  were  denied  the  right  to 
deduct  amounts  carried  to  the  account  of  depreciation  or  sinking 
funds,  and  they  were  compelled  to  deduct  the  tax  of  two  per  cent ' 
from  all  dividends  which  they  paid  to  their  stockholders,  whether 
their  stockholders  had  incomes  of  $4000  or  less. 

Many  of  these  defects  are  not  peculiar  to  the  tax  of  1894,  but 
are  inherent  in  the  income  tax  principle.  In  estimating  net  in- 
come a  vast  number  of  deductions  must  be  made  from  gross  in- 
come, most  of  which  are  vague,  and  many  of  which  are  practically 
indeterminate.  Money  rent  of  land,  for  instance,  is  frequently 
less  than  true  net  income,  because  the  property  is  appreciating 
in  value  and  because  in  many  countries,  particularly  in  England, 
land  ownership  yields  a  very  valuable  but  very  intangible  income 
in  the  shape  of  increased  respect  from  one's  neighbor.  Income 

1  It  is  important  to  note  that  taxes  on  the  interest  payments  upon  corporate 
bonds  could  not  in  the  United  States,  owing  to  decisions  of  the  federal  court, 
be  collected  at  the  source,  or  from  the  corporation. 


PUBLIC    REVENUES  637 

from  mines,  on  the  other  hand,  usually  represents  in  large  degree 
a  return  of  capital  invested,  since  the  mine  is  being  gradually 
exhausted ;  while  income  from  personal  exertions  frequently 
represents  a  similar  return  of  capital  expended  in  costly  educa- 
tion and  long  apprenticeship.  From  the  administrative  stand- 
point the  income  tax  has  almost  as  many  weaknesses  as  the 
general  property  tax,  the  number  of  cases  in  which  it  is  easier  to 
estimate  income  than  capital  value  being  offset  by  an  equal  num- 
ber of  instances  in  which  it  is  easier  to  estimate  capital  value  than 
income. 

Progressive  taxation  is  clearly  needed  somewhere  in  our  fiscal 
system,  state  or  federal;  and  the  latter  system  unquestionably  is 
sadly  inelastic.  But  when  all  the  obstacles  are  considered  — 
court  decisions,  administrative  weakness,  the  average  American's 
hostility  to  inquisitorial  taxation,  the  high  cost  of  collection,  the 
expense  involved  in  combining  progressive  taxation  with  collec- 
tion at  the  source,  and  the  theoretical  defects  which  the  income 
tax  shares  with  all  other  general  taxes  —  it  is  doubtful  whether 
the  income  tax  should  be  depended  upon  to  accomplish  the 
necessary  reforms.  The  true  path  of  reform  lies  not  in  seeking 
any  general  tax  either  upon  property,  income,  or  any  other  simple 
basis ;  it  consists  in  combining  all  principles  in  a  harmonious 
system,  using  income  as  the  basis  when  that  is  more  practicable, 
capital  value  as  the  basis  when  it  is  easier  to  measure  wealth  than 
earnings,  and  resorting  to  consumption  at  perhaps  a  lower  rate 
when  both  wealth  and  income  are  particularly  difficult  to  deter- 
mine. 

Inheritance  Taxes. — The  recrudescence  of  the  income  tax 
project  in  recent  years  has  undoubtedly  been  due  to  a  desire  to 
improve  the  distribution  of  wealth  and  reduce  "swollen  fortunes," 
but  to  allow  swollen  fortunes  to  accumulate  wrongly  and  then  to 
attempt  to  correct  our  mistake  by  taxing  them  4  or  5  per 
cent  is  to  palter  with  justice  and  to  play  at  reform.  There  are 
many  other  remedies,  more  direct,  more  logical,  more  efficient. 
Among  them  may  properly  be  included  the  regulation  and  taxa- 
tion of  inheritances. 

When  the  first  edition  of  this  work  was  written  in  1893,  inherit- 


638  OUTLINES   OF  ECONOMICS 

ance  taxes  were  being  collected  in  only  five  of  the  states,  and  so 
strong  were  the  objections  to  its  wide  adoption  that  the  author 
felt  called  upon  to  point  out  that  unregulated  collateral  inherit- 
ance was  an  unjustifiable  survival  of  the  clan  system  that  was 
being  carried  to  ridiculous  lengths  at  that  time.  Since  the  pub- 
lication of  the  first  edition,  however,  inheritance  taxation  has 
spread  rapidly,  being  employed  in  at  least  thirty-two  states  in 
1906,  and  with  the  spread  of  the  tax  has  come  a  most  significant 
development  of  progressive  rating  and  taxation  of  direct  as  well 
as  collateral  heirs.  To-day  one  never  hears  of  the  "inherent 
right"  of  decedents  to  control  absolutely  the  disposition  of  their 
property  in  perpetuity,  and  the  right  of  the  legislature  to  regulate 
inheritance  in  behalf  of  the  general  social  welfare  is  hardly  dis- 
puted. Mr.  Andrew  Carnegie,  for  instance,  advocates  a  rate  of 
50  per  cent  upon  the  estates  of  millionaires. 

At  the  present  time  the  inheritance  tax  is  not  very  productive 
except  in  New  York  and  Pennsylvania,  which  received  in  the 
fiscal  year  1905-1906,  $4,713,311  and  $1,507,962,  respectively, 
from  this  source.  In  all,  about  $10,000,000  a  year  is  now  received 
from  this  source  in  the  various  states  employing  the  tax.  The 
important  fact  is  that  the  initial  inertia  and  opposition  have  been 
overcome  and  the  ground  cleared  for  the  really  efficient  use  of 
this  tax  as  a  means  of  breaking  up  large  fortunes  and  increasing 
the  revenues.  The  new  type  of  the  inheritance  tax  is  well  illus- 
trated by  the  Wisconsin  law  of  1903,  which  applies  to  direct  as 
well  as  collateral  heirs,  and  which  graduates  the  rates  according 
to  relationship  and  the  amount  of  the  individual  share,  and  not 
by  the  size  of  the  estate.  The  highest  rate  in  the  Wisconsin  tax  — 
applying  to  shares  in  excess  of  $500,000  given  to  distant  relatives 
and  strangers  —  is  15  per  cent. 

Great  as  our  progress  has  been  in  this  respect,  our  legislation 
still  falls  short  of  the  demands  of  common  sense.  Why  should 
collateral  inheritance  apart  from  a  will  be  allowed  at  all  except 
among  near  relatives?  Why  should  third  cousins  inherit  from 
one  another  at  all  unless  money  is  left  by  will  ?  Are  third  cousins 
nearer  to  one  than  the  town  or  city  in  which  one  has  lived  and 
where  one  has  been  able  to  acquire  a  fortune?  The  extent  to 


PUBLIC  REVENUES  639 

which  intestate  collateral  inheritance  is  carried  is  a  survival  of 
the  sentiment  of  the  time  when  people  lived  in  clans,  and  is  illogi- 
cal in  our  day.  Right  and  duty  should  be  coordinated.  Ought 
I  to  be  compelled  by  law  to  support  an  uncle  who  is  unable  by 
incapacity  to  earn  a  livelihood?  Then  I  should  inherit  from 
him;  otherwise  it  does  not  seem  clear  that  I  should  unless  he 
leaves  me  property  by  will.  So  far  as  practicable  the  circle  of 
legal  duties  ought,  however,  to  be  extended  so  as  to  include  the 
circle  of  vital  relationship.  The  property  should  go  to  the  State 
in  the  absence  of  near  relatives  when  no  will  is  made.  The  clan 
is  dead  and  forgotten;  ordinarily  there  is  neither  acquaintance 
nor  recognizable  obligation  between  second  cousins,  not  to  men- 
tion twenty-second.  Inheritances  thus  bestowed  are  pure  gifts, 
wanton  disturbances  of  existing  abilities  to  use  property.  The 
modern  clan  is  society,  and  to  it  belong  all  claims  to  inheritance 
falling  outside  the  circle  of  vital  relations.  The  enlightened  Eng- 
lish jurist,  Jeremy  Bentham,  wished  to  restrict  inheritance  and 
extend  escheat,  and  thus  abolish  taxation  altogether,  but  this  is 
going  too  far. 

We  have  introduced  the  inheritance  tax  at  this  point  —  between  the 
discussion  of  federal  and  state  taxation  —  because  some  doubt  exists  whether 
it  should  be  assigned  to  the  federal  or  state  governments.  With  two  excep- 
tions the  arguments  are  almost  all  in  favor  of  assignment  to  the  state :  (a)  The 
inheritance  tax  is  needed  to  effect  the  separation  of  state  and  local  revenues, 
a  reform  earnestly  advocated  by  most  authorities.  (6)  Inheritance  taxes 
should  not  be  levied  by  both  state  and  federal  governments,  yet  the  latter 
cannot  prevent  the  state  governments  from  making  use  of  the  tax.  As  it  is 
easier  for  one  jurisdiction  to  refrain  from  introducing  the  tax  than  for  many 
jurisdictions  to  cease  using  it,  the  federal  government  should  stand  aside. 
(c)  Furthermore,  the  natural  machinery  of  assessment  —  the  probate  courts 
—  can  be  employed  by  the  state,  but  not  by  the  federal  government;  and, 
in  the  long  run,  the  cost  of  administering  the  tax  would  probably  be  much 
greater  when  used  by  the  federal  government. 

The  case  for  federal  taxation  rests  upon  the  desirability  of  levying  a  very 
high  rate  upon  large  inheritances,  and  the  possibilities  of  unjust  double 
taxation  under  the  state  system,  (a)  Many  persons  would  be  disposed  to 
move  away  from  any  particular  state  which  imposed  inheritance  taxes  as 
high  as  sound  policy  demands,  but  few  would  take  up  their  residence  entirely 
outside  of  the  United  States  or  transfer  their  investments  to  foreign  countries, 
on  this  account.  (6)  State  inheritance  taxes  upon  personal  property  offer 


640  OUTLINES   OF  ECONOMICS 

unusual  temptations  to  double  and  multiple  taxation.  John  Smith,  domi- 
ciled in  Pennsylvania,  dies  leaving  100  shares  of  stock  in  a  New  Jersey 
corporation,  which  shares  are  on  deposit  in  a  New  York  trust  company. 
Under  these  circumstances  Pennsylvania,  New  Jersey,  and  New  York  might 
all  levy  taxes  upon  these  shares  of  stock.  This  kind  of  multiple  taxation 
is  very  much  more  vicious  than  the  double  taxation  which  would  result  from 
state  and  federal  taxation  of  inheritances. 

The  fact  that  the  federal  government  cannot  prohibit  state  inheritance 
taxes  appears  to  be  a  conclusive  argument  in  favor  of  state  taxation.  But 
unless  the  several  states  learn  to  restrain  their  legal  powers  of  taxation  vol- 
untarily, and  do  away  with  multiple  taxation  by  some  species  of  agreement 
concerning  the  equities  of  the  situation,  an  intolerable  condition  of  affairs 
is  likely  to  result  which  will  add  indefinite  strength  to  the  arguments  in 
favor  of  a  federal  tax.  Exclusive  federal  taxation  through  a  constitutional 
amendment  is  unlikely,  but  not  impossible. 

STATE  AND  LOCAL  TAXATION 

General  Property  Tax.  —  The  key  to  the  revenue  system  of  our 
state  and  local  governments,  and  by  far  the  most  important  tax 
collected  in  the  United  States,  is  the  general  property  tax,  which 
supplied,  in  1902,  82  per  cent  of  the  tax  receipts  of  the  state  and 
local  governments  and  51  per  cent  of  all  taxes  collected  in  the 
country,  national,  state,  and  local.  The  most  important  char- 
acteristic of  this  tax  is  suggested  by  the  word  "general,"  —  the 
tax  is  levied  in  theory  upon  nearly  all  property,  real  and  personal, 
in  the  hands  of  the  people. 

Though  the  administration  of  the  property  tax  differs  in  many 
details  among  the  states,  it  is  the  usual  custom  for  assessors  in 
each  community  to  prepare  complete  statements  of  all  kinds  of 
taxable  property  owned  by  the  people  of  the  community.  In 
some  states  the  assessors  receive  from  all  residents  sworn  "lists" 
of  property  owned  and  subject  to  tax.  By  the  terms  of  the  law 
the  property  is  supposed  to  be  rated  at  its  true,  full  value,  though 
by  the  acknowledged  practice  of  assessors  and  courts  of  review, 
the  real  rates  vary  widely  from  state  to  state,  from  community 
to  community,  and  from  individual  to  individual.  On  the  basis 
of  the  property  valuations  thus  made  the  state  and  local  govern- 
ments levy  direct  taxes  at  a  rate  fixed  from  year  to  year  according 
to  fiscal  needs.  The  tax  is  then  collected  by  local  officers,  and  of 


PUBLIC   REVENUES  641 

the  whole  amount  the  portion  levied  by  the  county  and  state  is 
passed  on  to  the  designated  officers  after  each  minor  political 
division  has  set  aside  its  share. 

As  yet  few  economists  who  have  written  upon  the  subject,  and 
few  state  officers  who  have  had  to  do  with  the  administration  of 
the  tax,  have  ever  been  able  to  speak  of  it  except  in  terms  of  the 
severest  condemnation.  Naturally,  then,  there  is  now  a  strong 
tendency  to  work  away  from  this  form  of  taxation.  Some  of  the 
many  serious  faults  which  the  general  property  tax  has  every- 
where shown  call  for  comment  and  explanation. 

1.  Unjust  Apportionment.  — The  first  of  the  defects  of  the  tax 
appears  in  the  apportionment  of  the  state's  share  of  the  tax- 
Each  community  has  a  narrow,  selfish  interest  in  reducing  its 
valuation  that  it  may  escape  its  just  share  of  the  tax.    The  same 
mean  struggle  is  especially  frequent  between  city  and  country 
districts.    To  correct  the  evil,  boards  of  equalization  are  usually 
appointed,  but  experience  has  shown  that  such  boards  usually 
do  their  work  in  a  most  perfunctory  way.     Although  earnest 
study  of  assessments   may  and  sometimes  does  secure  a  sub- 
stantially just  apportionment  between  county  and  county,   this 
equalization    does    not   correct    the   glaring   inequalities    within 
particular  counties,  and  even  within  single  assessment  districts. 

2.  Inequality  as  between  Realty  and  Personalty.  —  In  the  second 
place,  the  general  property  tax  has  proved  grossly  inequitable  in 
laying  an  undue  proportion  of  its  burden  upon  real  property, 
allowing  various  forms  of  personal  property  to  escape  with  a  slight 
tax  or  with  no  tax  at  all.     A  secondary  result  of  this  inequality 
is  that  the  rural  districts  bear  a  disproportionate  burden,  since 
the  greater  part  of  the  tax-escaping  personalty  is  owned  by  the 
wealthy  citizens  of  our   cities. 

3.  Inequalities   of    City    Assessments.  —  Very    similar    to    the 
preceding  evils  is  the  further  injustice  wrought  by  the  tax  through 
the  disproportionate  assessment  of  the  pieces  of  real  estate  in 
cities.    Thus,   an   investigation   in    St.   Paul,   Minnesota,  cover- 
ing over  twenty-five  hundred  pieces  of  property  worth  in  the 
aggregate  more  than  five  million  dollars,  showed  that  the  average 
ratio  of  assessed  to  true  value  of  parcels  worth  less  than  $5000 

2T 


642  OUTLINES   OF   ECONOMICS 

was  63  per  cent,  while  the  similar  ratio  for  parcels  worth  more  than 
$5000  was  56  per  cent.  A  similar  investigation  made  in  Wis- 
consin and  covering  more  than  16,000  pieces  of  property  showed 
a  glaring  inequality  between  very  small  and  very  large  properties 
(63  per  cent  and  47  per  cent  respectively  of  true  value),  but  sub- 
stantial uniformity  in  the  long  run  for  properties  of  medium  size. 
Both  investigations  showed  that  unimproved  real  estate  was  or- 
dinarily taxed  at  a  very  much  higher  ratio  than  improved  property. 
In  many  districts,  also,  real  estate  owned  by  non-residents  is  taxed 
at  a  higher  figure  than  real  estate  owned  by  residents. 

4.  Temptation  to  Dishonesty.  —  It  follows  from  the  evils  already 
described  that  the  general  property  tax  leads  to  a  shocking  amount 
of  dishonesty,  perjury,  bribery,  and  other  forms  of  corruption. 
Indeed,  as  one  writer  has  expressed  it,  "  The  general  property 
tax  has  gone  far  toward  making  perjury  respectable  and  even 
virtuous." 

5.  Fundamental  Theoretical  Defects.  —  But  the   most  funda- 
mental defect  of  the  general  property  tax  is  found  in  the  fact  that 
it  is  an  incongruous  mixture  of  real  and  personal  taxes.     Real 
estate  is  taxed  at  its  situs,  irrespective  of  ownership  or  the  tax- 
paying  ability  of  the  owner  in  a  great  majority  of  states.    The 
personal  obligation  of  the  owner  to  support  the  government  under 
which  he  immediately  lives,  is  met  practically  everywhere  by  that 
part  of   the  tax  which   falls   upon  personal  property,   personal 
property  paying  at  the  domicile  of  the  owner. 

This  distinction  between  real  and  personal  property  is  artificial, 
inequitable,  and  illogically  applied.  Personalty,  as  a  measure 
of  ability,  ought  to  be  accurately  computed  by  offsetting  liabilities 
against  assets,  so  that  the  taxpayer  would  pay  only  upon  net 
assets.  Yet  no  state,  with  the  possible  exception  of  New  Jersey, 
grants  full  and  complete  exemption  of  debts;  only  three  states 
permit  a  subtraction  of  debts  from  all  personalty;  the  rest 
either  refusing  any  abatement  for  debts  whatsoever  or  limiting 
the  abatement  to  subtraction  of  debts  from  money  or  money 
and  credits  or  other  restricted  classes  of  personalty.  Moreover, 
nearly  all  the  states  manipulate  their  definitions  of  real  property 
in  the  most  discreditable  manner,  causing  many  kinds  of  double 


PUBLIC   REVENUES  643 

taxation.  To  take  a  single  illustration:  most  states  tax  the  stock 
of  foreign  corporations  held  by  resident  citizens,  whether  the 
corporation  pays  full  taxes  at  its  situs  or  not.  Many  of  these 
states  tax  their  own  or  domestic  corporations  at  full  value,  thus 
indorsing  the  theory  that  a  corporation  should  be  taxed  as  a 
business  unit  where  the  business  is  carried  on.  Nevertheless, 
they  attempt  to  tax  the  stock  of  foreign  corporations  when  the 
stock  is  the  only  thing  they  can  reach.  Some  states,  though  not 
a  majority,  actually  tax  both  the  shares  of  stock  and  the  business 
of  domestic  corporations,  and  then  wonder  that  the  stockholders 
attempt  to  evade  the  inequitable  obligations  imposed  upon  them 
by  law. 

Reform  of  the  Property  Tax.  —  This  brief  outline  of  the  evils 
connected  with  the  general  property  tax  furnishes  us  with  the 
key  to  reform.  By  far  the  greatest  reform  that  could  possibly 
be  accomplished  would  result  from  placing  the  work  of  assess- 
ment on  a  scientific  basis,  by  appointing  expert  assessors  under 
civil  service  protection,  who  would  give  their  whole  time  to  the 
business  and  hold  their  places  during  good  behavior.  In  1902 
practically  three  fourths  of  the  revenues  collected  under  the 
general  property  tax  came  from  the  tax  on  real  property.  Now 
we  shall  undoubtedly  keep  the  real  estate  tax.  Nobody  advocates 
its  abandonment  or  believes  that  it  will  be  possible  to  get  along 
without  it;  and  with  trained  assessors  it  would  be  possible  to 
make  a  substantially  fair  assessment  of  real  property.  Yet  even 
the  assessment  of  real  estate  is  in  most  places  to-day  wretchedly 
unequal.  We  spend  a  great  deal  of  time  thinking  out  ambitious 
fiscal  reforms  that  will  remedy  the  present  system  by  revolutioniz- 
ing it,  overlooking  the  fact  that  the  remedy  for  the  deepest  and 
widest  evil  lies  within  our  reach,  neglected  and  unavailing,  not 
because  we  are  ignorant  of  its  potency,  but  because  we  lack  the 
will  resolutely  to  apply  it. 

At  the  same  time,  no  assessor,  however  expert  and  well-paid, 
can  ever  be  expected  to  assess  all  kinds  of  personal  property  with 
even  approximate  accuracy.  To  persist  in  the  attempt  to  assess 
all  the  property  of  every  person  is  simply  to  debase  public  morality 
and  convince  assessors  that  nothing  short  of  divine  wisdom  will 


644  OUTLINES   OF  ECONOMICS 

enable  them  to  satisfy  the  requirements  of  the  law.  In  short, 
the  more  intangible  forms  of  personal  property,  if  not  all  per- 
sonal property,  must  be  exempted  from  taxation,  and  the  loss  be 
made  up  by  the  introduction  of  simpler  and  more  workable  taxes. 
Probably  the  most  practicable  of  such  substitutes  is  the  tax  ad- 
justed to  the  rental  value  of  residences.  Of  course  in  individual 
cases  such  a  tax  would  violate  the  rules  of  exact  justice,  but  with 
suitable  exemptions  and  proper  adjustments  it  would  be  roughly 
equitable,  and  it  would  have  the  striking  advantages  of  simplicity, 
practicability,  and  substantial  certainty.  The  rental  value  of 
most  property  can  be  appraised  with  as  much  accuracy  as  the 
market  value  of  real  estate.  Inasmuch  as  this  tax  would  merely 
replace  the  present  property  tax  upon  the  more  intangible  forms 
of  personalty,  it  would  not  have  to  be  heavy,  and  for  this  reason 
minor  cases  of  inequality  would  not  be  very  important. 

The  present  property  tax  on  business  and  commercial  concerns, 
with  its  impossible  requirements  of  stock  valuations,  taxation  of 
book  accounts,  bills  receivable,  and  credits  generally,  should  be 
replaced  by  a  business,  license,  or  "ad  valorem"  tax,  adjusted 
to  income  in  the  first  two  cases,  or  to  capitalized  income  in  the 
case  of  an  "ad  valorem"  tax.  The  real  estate  and  permanent 
improvements  of  business  concerns  might  be  separately  taxed 
under  the  property  tax,  and  a  corresponding  deduction  made  from 
the  business  tax,  as  is  common  in  the  taxation  of  banks  and  cor- 
porations in  many  states.  We  should  then  have,  in  place  of  the 
general  property  tax,  a  real  tax  on  accumulated  or  realized  tangible 
property;  a  personal  tax  on  ability  as  measured  by  the  rental 
value  of  dwellings,  and  business  taxes  upon  earnings.  Although 
the  real  tax  would  in  appearance  take  no  cognizance  of  mortgages 
or  debts  secured  by  the  property  and  no  account  on  the  surface  of 
the  ability  of  the  owner,  it  would  not  in  reality  wholly  violate 
the  canon  of  taxation  according  to  ability.  The  man  buying  land 
on  contract  or  subject  to  a  mortgage,  would  take  into  account  the 
fact  that  he  would  be  called  upon  to  pay  taxes  upon  the  whole 
value  of  the  property,  irrespective  of  debt  or  incumbrance,  and 
the  price  would  be  adjusted  accordingly.  Or,  if  he  mortgaged  his 
land  after  he  had  acquired  ownership,  he  would  be  indemnified 


PUBLIC   REVENUES  645 

to  a  certain  extent  for  paying  all  the  taxes,  by  receiving  a  lower 
rate  of  interest  on  his  mortgage  than  he  would  be  enabled  to  secure 
if  the  creditor  were  liable  for  taxes  upon  that  part  of  the  property 
covered  by  the  mortgage.  Real  taxes,  which  take  no  cognizance 
of  the  financial  status  of  the  owner,  are  not  inequitable  when  they 
are  consistently  applied  and  supplemented  by  a  separate  system 
of  personal  taxation. 

All  these  taxes  destined  to  take  the  place  of  the  general  property 
tax  will  probably,  in  the  future,  be  assigned  to  the  local  govern- 
ments. If  necessary  to  provide  enough  revenue  for  the  state, 
however,  a  small  state  tax  could  equitably  be  levied  upon  real 
estate,  as  the  equalization  of  real  estate  assessments  among  the 
larger  governmental  divisions,  such  as  counties,  is  a  comparatively 
easy  matter.  Whether  the  state  will  be  able  to  get  along  without 
taxes  upon  real  estate,  depends  principally  upon  the  productivity 
of  certain  corporation  taxes,  the  proceeds  of  which  belong  logically 
to  the  state  as  opposed  to  the  local  governments.  This  absorption 
of  corporation  taxes  by  the  state  is  already  well  under  way  in  the 
more  advanced  commonwealths.  In  1902,  for  instance,  New 
York,  New  Jersey,  and  Pennsylvania,  together  raised  $26,177,731 
from  special  property  and  business  taxes  (practically  corporation 
taxes),  but  only  $12,055,851  from  the  general  property  tax.  In 
that  year  Delaware  made  no  use  of  the  general  property  tax  at 
all  for  state  purposes,  Connecticut  raised  only  $164,520  from  this 
source,  and  since  that  time  New  York  has  also  abandoned  general 
property  as  a  basis  of  state  taxation.  However,  the  supersession 
of  the  general  property  tax  is  only  true  in  the  North  Atlantic 
states,  speaking  generally.  In  all  the  states  and  territories  in 
1902,  53  per  cent  of  the  total  tax  receipts  came  from  the  general 
property  tax,  34  per  cent  from  special  property  and  business  taxes 
—  principally  on  corporations  —  about  1.4  per  cent  from  poll 
taxes,  something  over  6  per  cent  from  liquor  license  taxes,  and 
something  less  than  6  per  cent  from  other  licenses  and  per- 
mits.1 

Corporation  Taxes.  —  The  exact  way  in  which  any  corporation 

1  These  proportions  are  based  upon  state  receipts.     If  local  revenues  were 
included,  the  general  property  tax  would  appear  very  much  more  important. 


646  OUTLINES   OF  ECONOMICS 

should  be  taxed  depends  upon  a  great  variety  of  considerations, 
which  vary  from  place  to  place  and  from  time  to  time.  In  general, 
however,  the  following  elements  may  be  detected  in  the  more 
progressive  systems  of  corporation  taxation:  I.  The  incorpora- 
tion fee,  to  cover  the  clerical  expenses  of  registering  corporations 
and  the  value  of  the  privileges  granted  to  every  corporation,  the 
most  important  of  which  is  that  of  limited  liability.  This  charge 
should  be  imposed  on  all  joint-stock  companies,  should  vary  with 
the  amount  of  bonds  as  well  as  the  amount  of  stock  authorized, 
and  should  be  small,  unless  the  state  desires  to  restrict  narrowly 
the  incorporation  of  commercial  enterprises.  II.  The  franchise 
tax  proper,  to  cover  especially  valuable  privileges,  such  as  the 
right  to  use  the  public  streets  or  highways,  granted  to  most  public 
utility  companies.  This  is  essentially  a  contractual  payment, 
a  lease  or  royalty  rather  than  a  tax.  It  should  be  fixed  in  ad- 
vance for  a  definite  period  at  as  high  a  figure  or  rate  as  possible, 
and  when  fixed,  should  not  be  tampered  with  by  the  state  in 
justice  to  the  corporation.1  III.  The  general  property  tax  or  some 
equivalent,  designed  to  impose  upon  the  corporation  a  burden 
equivalent  to  that  borne  by  the  average  taxpayer  of  the  district. 
Inasmuch  as  good-will,  business  organization,  and  similar  intangible 
assets  are  property,  property  taxes  imposed  under  this  head  should 
cover  not  only  tangible  but  intangible  values  as  well,  including  the 
franchise  when  this  does  not  revert  to  the  state.  Corporations 
which  have  received  valuable  franchises  from  the  state  may 
properly  be  called  upon  to  pay  for  the  privilege  (under  II)  as  well 
as  upon  the  privilege  (under  III). 

This  differentiation  of  what  may  be  called  the  bases  of  cor- 
poration taxation  should  not  be  misunderstood.  Many  states 
merge  two  or  even  three  of  these  charges  in  a  single  tax,  and 
other  states  exempt  savings  banks,  insurance  companies,  and 
other  kinds  of  corporations  from  one  or  all  of  these  obligations. 
in  order  to  encourage  thrift  or  foster  the  industry  exempted. 

1  However,  where  a  long  or  perpetual  franchise  is  given,  provision  should  be 
made  for  the  readjustment  of  the  rental  by  arbitration  or  in  some  other  equitable 
way.  An  illustration  is  found  in  the  terms  of  the  franchise  under  which  the 
Pennsylvania  railroad  built  a  tunnel  under  the  North  River  and  erected  its  mag- 
nificent new  station  in  New  York  City. 


PUBLIC    REVENUES  647 

Such  exemptions  are  often  justifiable  and  socially  helpful.  But 
unless  these  separate  elements  are  kept  plainly  in  mind,  injustice 
is  almost  sure  to  follow.  To  treat  commercial  corporations, 
which  should  pay  Charges  I  and  III,  on  the  same  footing  as 
street  railway  or  telephone  companies,  which  should  pay  I,  II, 
and  III,  is  to  penalize  the  commercial  corporation  for  the  benefit 
of  the  general  public.  To  impose,  or  try  to  impose,  Charge  II 
upon  all  corporations,  on  the  theory  that  all  of  them  have  received 
exceedingly  valuable  privileges,  is  to  confuse  general  with  special 
corporation  privileges,  and  to  pave  the  way  for  "  corporation- 
baiting."  Finally,  although  it  is  not  necessary,  we  believe  real 
progress  will  be  hastened  by  observing  these  distinctions  in  prac- 
tice as  well  as  in  theoretical  analysis. 

The  third  element  in  corporation  taxes  noted  above  requires  further  dis- 
cussion. While  a  distinct  effort  is  noticeable  at  the  present  time  to  make 
the  tax  burden  upon  corporations  equal  to  that  upon  general  property,  and 
while  this  represents  a  distinct  advance  inasmuch  as  corporations  in  the  past 
have  escaped  their  due  share  of  taxation;  it  is  equally  true  that  the  move- 
ment has  no  logical  stopping  place.  If  the  general  property  tax  is  certain 
to  disappear,  as  most  economists  assert,  there  can  be  no  permanency  in  a 
reform  designed  to  equate  the  burden  of  taxation  upon  corporations  and 
general  property. 

As  we  have  seen,  the  general  property  tax  will  in  time  probably  break 
up  into  a  tax  upon  real  estate,  a  tax  upon  persons,  and  a  tax  upon  business. 
Corporation  taxes  will  naturally  fall  in  the  last  group.  When  we  have 
differentiated  these  taxes,  however,  we  shall  soon  learn  that  the  business  tax 
itself  must  be  differentiated.  Even  at  present  we  are  forced  to  do  this.  We 
exempt  building  associations  from  taxation,  give  savings  banks  the  benefit  of 
a  low  rate,  and  impose  unusually  heavy  taxes  on  saloons.  This  differentia- 
tion will  be  extended  in  the  future.  There  is  as  much  reason  to  impose  spe- 
cially heavy  taxes  upon  express  and  sleeping-car  companies,  for  instance,  as 
there  is  to  exempt  churches  and  deal  tenderly  with  mutual  aid  societies. 
This  differentiation  among  businesses  and  corporations  will  require  in  many 
states  a  constitutional  amendment,  permitting  the  classification  of  persons 
and  property  for  taxation.  But  that  is  a  reform  which,  it  is  hoped,  will  be 
realized  in  the  comparatively  near  future. 

When  all  property  is  taxed  where  it  lies,  —  irrespective  of  ownership,  — 
and  all  persons  where  they  live,  —  irrespective  of  the  situs  of  their  property,  — 
then  the  taxation  of  business  will  stand,  as  it  should,  in  a  sphere  of  its  own. 
Within  that  sphere  businesses  that  can  move  easily  to  other  states  will  of 
necessity  be  taxed  lightly,  as  they  are  to-day.  Businesses  which  derive 


648  OUTLINES   OF  ECONOMICS 

special  advantages  from  their  environment,  however,  will  pay  a  correspond 
ingly  heavy  rate.  Railways,  to  take  a  single  illustration,  will  pay  a  higher 
rate  than  some  businesses,  a  lower  rate  than  some  others,  but  in  any  event 
there  will  be  no  attempt  to  equate  the  tax  upon  railways  with  that  upon 
property  and  persons,  because  the  railway  will  pay  upon  its  property  as 
property,  upon  its  business  as  business,  and  the  owners  of  railway  securities 
will  pay  in  accordance  with  their  ability  as  measured  by  rent  or  some  similar 
index. 

Business  and  License  Taxes.  —  About  12  per  cent  of  state  tax 
receipts  in  1902  came  from  licenses  and  permits,  and  taking  the 
state  and  local  governments  together,  the  revenue  from  this 
source  in  1902  amounted  to  seventy-five  millions  of  dollars,  of 
which  over  fifty-five  millions  came  from  liquor  li censes.  The 
high  liquor  license  is  now  so  common  in  most  parts  of  the  coun- 
try that  its  social  and  fiscal  importance  needs  little  discussion. 
In  most  Southern  states,  however,  there  is  an  extensive  system 
of  business  licenses,  which  supplement  and  partly  replace  the 
general  property  tax.  The  significance  and  importance  of  the 
business  license  have  not  hitherto  been  sufficiently  appreciated. 
They  are  levied  in  theory  under  the  regulative  power  of  the 
government  rather  than  the  taxing  power;  but  they  have  by 
extension  and  multiplication  become  taxes  for  the  most  part,  as 
distinguished  from  sumptuary  charges  or  payments  for  small 
privileges. 

The  license  system  of  the  South  is  characterized  by  "many 
defects.  Here  and  there  traces  of  class  feeling  are  discerned,  as 
in  the  prohibitive  licenses  levied  upon  peddlers;  and  the  rates 
employed  are  often  illogical,  inconsistent,  and  inequitable  to  the 
point  of  absurdity.  In  a  few  cases  also,  these  taxes ~are  high 
enough  to  bar  certain  occupations  to  the  man  with  small  capital. 
But  on  the  whole  they  are  among  the  best  taxes  employed  by 
American  commonwealths.  They  are  easily  and  cheaply  col- 
lected, very  productive,  cause  little  or  no  complaint,  are  not 
excessive  as  a  rule,  and  exercise  little  or  no  influence  upon  prices. 
And  in  so  far  as  they  discourage  the  excessive  multiplication  of 
small  retail  shops  they  perform  the  useful  service  of  preventing 
almost  inevitable  loss  and  bankruptcy. 

The  great  significance  of  the  business  license  is  its  expression 


PUBLIC   REVENUES  649 

of  the  truth  that  the  general  property  tax  in  its  simple  form  is 
unsuited  to  the  taxation  of  business.  Under  the  property  tax, 
business  in  general  is  taxed  upon  its  tangible  assets,  i.e.  fixed 
plant  and  stock.  One  has  only  to  think  of  the  varying  relation- 
ship to  taxable  capacity  of  the  plant  and  stock  of  a  manufacturer, 
a  grocer,  an  express  company,  and  a  stock  broker,  to  realize  the 
grave  injustice  of  this  method  of  taxation.  In  countries  of  con- 
tinental Europe,  as  in  the  southern  part  of  the  United  States,  a 
wide  and  generally  satisfactory  use  is  made  of  the  business  tax. 
Eventually  we  must  come  to  the  same  thing  in  all  parts  of  this 
country.  But  the  tax  should  be  adjusted  to  earnings  on  profits 
in  a  more  effective  way  than  is  now  done  in  the  South. 

Poll  Taxes.  — The  poll  tax  is  the  oldest  tax  we  have  in  this 
country,  and  throughout  the  greater  part  of  the  colonial  period 
yielded  more  than  any  other  source  of  revenue.  It  aroused  bitter 
opposition  in  many  commonwealths  and  was  prohibited  by  the 
liberal  constitution  of  Maryland  at  the  beginning  of  the  Revolu- 
tionary War;  but  it  persisted  in  many  of  the  states,  and  still 
remains  the  most  important  source  of  revenue,  after  the  property 
tax,  in  a  few  of  the  Southern  states.  The  tax  still  stands  on  the 
statute  books  of  about  one  half  of  the  states,  and  is  nominally 
employed  as  a  highway  or  local  tax  in  a  still  larger  number  of 
commonwealths;  but  in  many  places  little  or  no  effort  is  made 
to  enforce  it.  In  Wisconsin,  for  instance,  no  attempt  is  made  to 
collect  the  poll  tax  in  more  than  half  of  the  local  taxing  districts. 
The  poll  tax  is  not  only  difficult  to  collect,  but  is  regressive  and, 
when  its  payment  is  required  as  a  prerequisite  to  the  exercise  of 
the  suffrage,  results  in  widespread  political  corruption.  "No 
concealment  need  be  made  of  the  fact  that  the  poll  tax  is  used  in 
Mississippi  as  a  means  of  disqualifying  the  negro  in  national 
elections  and  controlling  the  vote  in  local  elections."  l 

A  BALANCED  REVENUE  SYSTEM 

The  main  outlines  of  the  distribution  of  taxes  among  the  vari- 
ous governmental  units  have  already  been  suggested:  to  ttie 

1  C.  H.  Brough,  in  Studies  in  Slate  Taxation,  Johns  Hopkins  University 
Studies  in  Historical  and  Political  Science,  Vol.  XVIII,  p.  313. 


650  OUTLINES   OF   ECONOMICS 

federal  government  the  excise  and  customs  duties,  with  taxes  on 
transactions  in  times  of  war  or  emergency  and  the  taxes  on  inter- 
state commerce  hereafter  discussed;  to  the  state  governments  the 
inheritance  tax,  the  more  important  corporation  taxes,  and  some 
of  the  license  taxes;  to  the  local  governments  the  tangible  property 
tax,  the  occupation  tax,  such  of  the  license  and  business  taxes  as 
are  not  taken  by  the  state  and  federal  governments,  and  taxes 
or  royalties  on  municipal  franchises.  Public  franchises  or  munici- 
pal management  of  public-service  monopolies  should  be  made 
in  the  United  States,  as  in  Europe,  to  pay  a  considerable  part 
of  the  local  expenses  of  government. 

It  will  be  observed  that  business  and  corporation  taxes  are  to 
be  divided  among  the  several  governmental  divisions.  The  prin- 
ciples upon  which  this  distribution  should  be  made  are  very 
obscure  and  give  rise  to  many  important  problems.  The  first 
and  most  important  of  these  problems  has  to  do  with  federal 
control  of  interstate  commerce.  Business,  like  property,  has  a 
natural  situs  for  purposes  of  taxation,  and  companies  engaged  in 
interstate  commerce  should  be  taxed  by  or  under  the  direction 
of  the  national  government. 

Federal  Control  of  the  Taxation  of  Interstate  Commerce.  — 
State  taxation  of  companies  engaged  in  interstate  commerce  gives 
rise  to  many  problems.  Railways  may  be  used  as  an  illustra- 
tion. The  enormous  difference  between  the  value  of  the  physical 
property  and  the  value  of  the  stock  and  bonds  or  the  capitalized 
earnings  of  railways  has  called  public  attention  to  the  presence 
of  vast  intangible  values  in  railway  property.  In  order  to  tax 
these  values  —  which  the  courts  have  decided  to  be  "property" 
—  the  railway  has  to  be  assessed  or  valued  as  a  unit  —  an  exceed- 
ingly difficult  and  costly  undertaking  —  and  the  share  of  this 
valuation  belonging  to  the  state  in  question  has  to  be  determined. 
This  apportionment  of  values  to  state  jurisdictions  is  not  only 
artificial  and  difficult,  but  opens  the  way  for  much  abuse.  Each 
state  is  tempted  to  adopt  the  method  which  gives  it  the  largest 
share  of  the  assessed  value ;  and  the  railway  has  not  only  to  adapt 
itself  to  as  many  methods  of  assessment  as  there  are  states,  but 
it  is  not  unlikely  to  be  much  overtaxed  in  the  process,  unless  it 


PUBLIC   REVENUES  651 

"goes  into  politics"  with  the  avowed  purpose  of  controlling 
legislation  in  its  own  interests. 

Federal  control  would  substitute  a  single  assessment  for  many 
assessments,  and  one  method  of  apportionment  for  the  great 
variety  of  conflicting  methods  now  in  use.  These  essential  re- 
forms having  been  determined  upon,  the  other  problems  of  fed- 
eral control *  may  be  settled  in  a  variety  of  ways,  (a)  The  federal 
government  might  confine  its  work  to  valuation  and  apportion- 
ment, certifying  to  each  state  the  valuation  of  the  property  as- 
signed to  it,  to  be  taxed  there  at  the  same  rate  as  other  similar 
property.  This  plan,  however,  assumes  that  railways  will  con- 
tinue to  be  taxed  in  accordance  with  the  underlying  principles 
of  the  general  property  tax.  (b)  Or  the  federal  government 
might  permit  the  physical  property  of  railways  to  be  taxed  by 
the  states  in  which  it  is  situated  and  confine  itself  to  taxes  on  the 
business  as  such,  —  a  method  in  harmony  with  the  general  plan 
of  business  taxation  suggested  above,  (c)  Or  it  might  wholly 
prohibit  state  taxation  of  either  the  property  or  business  of  inter- 
state companies,  although  the  constitutionality  of  such  prohibi- 
tion is  particularly  doubtful. 

Assuming  that  one  of  the  last  two  plans  will  be  adopted,  the 
federal  government  could  (a)  either  refund  the  proceeds  of  the 
tax  upon  interstate  business  to  the  various  states,  in  proportion 
to  the  amount  of  business  done  in  each  state  or  some  other  equi- 
table method  of  apportionment;  or  (b)  retain  the  revenue  itself 
to  be  used  in  meeting  emergency  needs  or  in  reducing  the  con- 
sumption taxes  which  now  weigh  so  heavily  upon  the  poor. 

The  constitutionality  of  the  whole  project  of  federal  control 
is  in  grave  doubt,  although  this  aspect  of  the  subject  cannot  be 
discussed  here.  But  that  Congress  will  eventually  be  forced  to 
use  all  the  power  that  it  possesses  to  bring  order  out  of  the  exist- 
ing chaos  seems  as  inevitable  as  it  is  desirable. 

Separation  of  the  Sources  of  State  and  Local  Revenues. — Just 
as  Congress  should  assume  control,  if  possible,  of  the  taxation  of 
interstate  railways,  express,  telegraph,  sleeping  car  and  steam- 

1  The  desideratum  is  federal  control  of  the  taxation  of  interstate  corporations, 
not  necessarily  federal  taxation. 


652  OUTLINES    OF   ECONOMICS 

ship  companies,  so  the  state  government  should  assume  control 
of  the  taxation  of  inter-urban  railways,  telephone  companies,  and 
other  concerns  whose  business  is  "state-wide"  in  scope.  In 
recent  years  economists  have  urged  the  state  to  set  aside  enough 
such  taxes  for  its  own  exclusive  use,  until  —  with  such  revenues 
as  the  state  derived  from  inheritance,  poll,  and  license  taxes  —  it 
would  be  able  to  meet  expenses  without  resorting  to  general  levies 
upon  property. 

This  programme  is  in  the  main  admirable,  and  would  bring  to 
an  end  all  those  evils  arising  out  of  the  efforts  of  local  districts 
to  escape  state  taxation  by  underassessment  of  property.  But 
the  project  has  dangers  and  defects  of  its  own.  In  the  first  place 
it  does  not  provide  for  the  abolition  of  the  general  or  personal 
property  tax  within  the  local  districts,  but  permits  the  latter  to 
persist  in  the  attempt  to  tax  stocks  and  bonds,  money  and  credits, 
manufacturing  plant  and  merchants'  stocks.  In  our  opinion  the 
attempt  to  tax  all  kinds  of  property  should  be  abolished  by  the 
state  legislatures,  without  waiting  for  the  agreement  of  the  local 
governments. 

In  the  second  place,  it  would  be  unwise  for  the  state  govern- 
ment to  monopolize  corporation,  inheritance,  and  license  taxes 
merely  to  get  upon  an  independent  footing,  and  then  leave  the 
local  governments  to  shift  for  themselves.  Compared  with  local 
taxation,  state  taxation  is  really  a  matter  of  small  importance, 
and  the  great  problem  of  commonwealth  finance  is  how  the  large 
cities,  in  particular,  are  to  meet  the  enormous  expenditures  thrust 
upon  them  by  the  mere  growth  and  congestion  of  population. 
Take  the  liquor  license,  for  example.  The  saloon  contributes 
very  materially  to  the  expenses  of  the  city  government.  If  the 
state  were  to  take  over  the  liquor  license  for  its  own  use,  it  would 
deprive  the  city  of  one  of  its  most  logical  and  necessary  sources 
of  revenue.  For  similar  reasons  the  state  should  be  exceedingly 
careful  in  selecting  the  corporations  upon  which  local  taxes  are 
not  to  be  levied.  To  prohibit  the  taxation  of  railways  by  the 
local  governments  is  wise,  but  to  deprive  them  of  the  power  to 
tax  light,  heat,  and  power  companies,  as  was  recommended  by 
the  California  Commission  on  Revenue  and  Taxation,  would  be 


PUBLIC   REVENUES  653 

going  too  far  in  the  average  state.1  In  short,  there  is  a  logical 
and  important  connection  between  business  or  property  and 
particular  divisions  of  government.  The  true  method  is  to  ascer- 
tain the  character  of  this  relationship  and  assign  the  business  or 
property,  for  purposes  of  taxation,  to  the  proper  governmental 
division.  Then  if  the  state  has  too  much  revenue,  it  may  be 
apportioned  to  the  local  districts.  If  it  has  too  little,  the  re- 
mainder may  be  raised  by  taxes  upon  the  equalized  value  of  real 
estate.  Experience  has  shown  that  it  is  a  comparatively  easy 
matter  to  equalize  real  estate  values  among  counties  or  similar 
divisions,  with  all  the  accuracy  necessary  for  the  equitable  distri- 
bution of  a  light  tax. 

QUESTIONS 

1.  Why  are  the  terms  "direct  "  and  "indirect"  taxes  particularly  vague 
and  equivocal  ? 

2.  Explain  why  no  protection  is  given  the  home  producer  when  the 
import  duty  is  shifted  upon  the  foreigner. 

3.  What  is  the  greatest  fiscal  defect  of  American  customs  taxation?     Can 
this  defect  be  remedied  ? 

4.  Are  excise  taxes  ethically  justifiable  ?     Do  they  materially  check  con- 
sumption when  imposed  upon  alcoholic  beverages  and  tobacco? 

5.  Do  you  know  of  any  state  which  levies  an  income  tax  at  the  present 
time  ?     Is  the  tax  successful  ? 

6.  What  arguments  in  favor  of  introducing  a  federal  income  tax  can 
fairly  be  derived  from  European  experience? 

7.  Should  income  representing  not  earnings  but  simple  return  of  capital 
be  taxed?     Should  income  which  is  saved  and  immediately  reinvested  be 
taxed  ?     Is  it  not  double  taxation  to  tax  savings  and  the  earnings  from  such 
savings  as  well  ? 

8.  The  inheritance  tax  has  been  justified  as  a  compulsory  payment 
according  to  accidental  or  suddenly  enhanced  ability.     Is  this  explanation 
logical  ? 

9.  Should  corporations  be  taxed  at  the  same  rate  as  unincorporated 
business  concerns?     Should  any  definite  relation  between  the  two  kinds  of 
taxes  be  maintained? 

10.  Contrast  the  taxation  of  national  banks  in  your  own  state  with  the 
taxation  of  trust  companies,  ordinary  commercial  or  manufacturing  corpora- 
tions, and  unincorporated  business  concerns. 

1  Although  the  recommendation  of  the  California  Commission  is  doubtless 
justified  for  California  by  peculiar  local  conditions. 


654  OUTLINES   OF  ECONOMICS 

11.  What  difference  is  there  between  real  and  personal  taxes ?     Are  real 
taxes  inequitable  ? 

12.  Are  assessors  elected  or  appointed  in  your  own  state?     Do  they  re- 
quire taxpayers  to  declare  their  personal  property  in  great  detail  ?     Do  the 
local  assessment  rolls  contain  separate  figures  for  real  estate  and  improve- 
ments?    Is  the  property  of  non-residents  specially  designated? 

13.  Why  is  the  general  property  tax  particularly  unsuited  to  the  taxation 
of  business  and  professional  men  ? 

14.  Should  the  federal  government,  if  it  possesses  the  power,  make  the 
taxation  of  interstate  commerce  corporations  uniform  throughout  the  United 
States  ? 

REFERENCES 

BULLOCK,  C.  J.  Selected  Readings  in  Public  Finance,  Chaps  VII-XIX; 
and  "  The  Taxation  of  Corporations  in  Massachusetts,"  Quarterly 
Journal  of  Economics,  Vol.  XXI,  pp.  181-246. 

ELY,  R.  T.  Evolution  of  Industrial  Society,  Chap.  VII,  "The  Inheritance 
of  Property,"  pp.  271-314. 

HOLLANDER,  J.  H.,  Ed.  Studies  in  Stats  Taxation,  Johns  Hopkins 
University  Studies  in  Historical  and  Political  Science,  Series  XVIII, 
passim. 

McCREA,  R.  C.  "The  Taxation  of  Personal  Property  in  Pennsylvania," 
Quarterly  Journal  of  Economics,  Vol.  XXI,  pp.  52-95. 

Report  of  the  Industrial  Commission.  "Taxation,"  Vol.  XIX,  pp.  1031- 
1069;  "Taxation  in  Various  States  and  in  Canada  with  Special 
Reference  to  the  Taxation  of  Corporations,"  Vol.  XI,  Part  VII ; 
"Taxation  of  Transportation  Companies,"  Vol.  IX,  pp.  1006-1091. 

Reports  of  State  Tax  Commissions.  Upon  the  topics  indicated  see  "  The 
Massachusetts  Tax  System  and  its  Workings,"  Massachusetts  Com- 
mission of  1897,  pp.  1-73;  "  Public  Service  Corporations,"  Wisconsin 
Commission,  1901,  pp.  72-121;  "Taxation  of  Credits,"  ibid.  1903, 
pp.  88-144 !  "  Mortgage  Taxation,"  ibid.,  1907,  pp.  303  et  seq. ;  "  Railway 
Taxation,"  Ontario  Commission,  1905. 

WEST,  MAX.  The  Inheritance  Tax,  Chap.  VII,  "  Inheritance  Taxes  in  the 
United  States,"  and  Chap.  IX,  "Economic  Theory  of  the  Inheritance 
Tax." 


BOOK   IV 
HISTORY   OF   ECONOMIC   THOUGHT 


CHAPTER  XXXVI 
HISTORY   OF   ECONOMIC   THOUGHT 

The  Development  of  Economic  Thought.  —  If  society  were  not 
progressive,  history  would  be  of  comparatively  little  value.  The 
study  of  the  present  would  give  us  all  the  essential  facts  needed  to 
understand  society,  and,  problems  once  settled  or  institutions  once 
explained,  the  work  would  not  have  to  be  done  over  again.  All 
this,  however,  is  the  very  contrary  of  the  truth,  so  contrary,  indeed, 
that  one  of  the  most  difficult  things  that  either  the  scientist  or  the 
statesman  and  reformer  has  to  do  is  to  overcome  this  idea  that 
institutions  are  fixed.  Society  moves  but  slowly,  to  be  sure,  and 
its  development  is  so  much  slower  than  that  of  the  individual  that 
he  easily  overlooks  its  changes  altogether. 

The  relation  is  much  like  that  of  a  tourist  to  a  glacier.  He 
climbs  nimbly  over  its  rigid  mass  with  as  little  sense  of  under- 
lying movement  as  when  he  climbs  the  mountain  itself.  He  maps 
out  its  confines  and  its  jutting  peaks  with  as  much  accuracy  as  the 
rest  of  the  landscape.  He  returns  to-morrow  and  next  year  and 
sees  no  important  changes,  and  so  thinks  his  investigation  is  com- 
plete. But  let  a  century  elapse,  and  his  map  is  wholly  wrong. 
Another  observer  stumbling  upon  it  wonders  that  a  man  could 
have  made  such  blunders,  and  makes  his  map  with  painstaking 
exactness.  But  he  may  be  as  wrong  as  the  first;  indeed,  he  is  as 
wrong  unless  he  has  discovered  the  cause  of  the  discrepancy.  The 
glacier  moves.  This  slow  but  constant  and  resistless  motion  is 
the  cause  of  every  seam  and  crevasse,  of  the  huge  piles  of  bowlders 
at  the  sides  and  base,  in  short,  of  the  great  landmarks  upon  the 
map.  The  tourist  may  disregard  it,  but  not  the  engineer  who 
shapes  the  interests  of  a  remote  posterity. 

The  social  sciences  have  a  similar  experience.  Map  succeeds 
map,  each  claiming  that  former  maps  are  false,  and  assuming  that 
2u  657 


658  OUTLINES  OF  ECONOMICS 

conditions  are  fixed  and  that  present  and  local  explanations  apply 
to  all  times  and  places,  until  finally  the  discrepancy  is  explained 
by  the  great  law  of  social  movement,  which  in  turn  becomes  the 
object  of  investigation.  When  this  movement  is  discovered,  a  new 
importance  attaches  to  past  explanations.  While  they  may  have 
made  the  mistake  of  supposing  that  their  conclusions  were  of  per- 
manent and  universal  application,  they  contain  much  valuable 
observation,  from  which  we  may  discover  the  laws  of  progress. 
Of  course  these  maps  of  society  have  been  imperfect  —  much 
more  so  than  maps  of  glaciers.  The  facts  are  so  complex,  and 
men  are  so  influenced  by  their  particular  environment,  that  no  one 
man  ever  sees  all  the  facts  or  arranges  them  in  their  true  relations. 
Nevertheless,  these  observations  have  great  value  to  us,  and  their 
onesidedness  is  usually  apparent.  Moreover,  it  is  the  very  dis- 
covery of  these  limitations  which  makes  our  own  thought  broader 
and  more  comprehensive. 

Our  study  of  history  thus  has  two  phases,  never  separable  in 
practice,  though  distinct  in  character,  —  the  history  of  economic 
life  and  the  history  of  economic  thought.  With  the  former  our 
study  began,  and  its  importance  has  been  easily  felt.  The  latter 
was  reserved  until  the  close.  No  sound  system  of  economic 
thought  can  be  built  up  without  taking  account  of  past  systems. 
The  thought  of  the  present  must  master  the  thought  of  the  past  if 
it  would  be  better  than  the  thought  of  the  past. 

Economic  Ideas  in  the  Ancient  World.  — The  assertion  is  some- 
times made,  or  at  least  the  impression  is  frequently  given,  that  no 
economic  thought  existed  until  Adam  Smith.  This  impression  is 
erroneous,  and  derives  its  plausibility  from  the  fact  that  before 
Adam  Smith  economic  subjects  were  treated  either  disjointedly 
and  in  a  monographic  way,  or  else  in  connection  with  ethics  and 
political  philosophy.  But  in  treating  economics  in  connection 
with  ethics  and  politics,  the  older  writers  were  merely  following  an 
instinctive  method  of  dealing  with  economic  truths,  to  which  in  a 
certain  degree  later  writers  are  returning.  Indeed,  if  we  are  to 
derive  the  most  possible  benefit  from  this  brief  survey  of  the  devel- 
opment of  economic  thought,  it  is  necessary  to  begin  many  cen- 
turies before  Adam  Smith,  with  the  Greeks. 


HISTORY   OF  ECONOMIC  THOUGHT  659 

The  Greeks.  —  The  three  writers  among  the  Greeks  most  inter- 
esting to  the  economist  are  Plato,  Aristotle,  and  Xenophon.  Both 
Xenophon  and  Aristotle  (or,  more  probably,  some  unknown  dis- 
ciple of  Aristotle)  have  treatises  upon  the  specific  subject  of  (Eco- 
nomics, but  these  are  devoted  principally  to  domestic  economy,  or 
the  management  of  the  household;  and  the  more  important  eco- 
nomic ideas  of  the  Greek  writers  are  derived  from  their  works 
which  deal  primarily  with  political  and  ethical  subjects. 

Plato  describes  a  Utopia  in  his  Republic.  His  aim  was  to  picture 
an  ideal  society  in  which  the  ills  of  society  were  to  be  corrected  by 
a  communistic  State,  and  he  included  a  communism  even  of  wives 
and  children,  going  farther  than  modern  communists.  The  com- 
munism of  Plato  admitted,  strange  as  it  may  seem,  slavery,  on 
which  his  social  superstructure  indeed  rested  as  a  base.  The  Laws 
of  Plato  is  a  more  practical  work.  It  aims  to  present  not  the  best 
possible  state,  but  only  the  second  best,  and  deals  to  a  greater 
extent  with  existing  institutions. 

Aristotle's  principal  work  for  us  is  the  Politics,  and  it  is  indeed 
one  of  the  most  remarkable  books  in  the  world's  history.  Its  in- 
fluence is  strongly  felt  to-day,  for  it  was  carefully  studied  by  theo- 
logians of  the  middle  ages,  and  through  them  entered  into  the 
thought  and  life  of  their  time;  and  the  thought  and  life  of  their 
time  can  be  seen  by  the  careful  student  to  have  entered  in  a  thou- 
sand ways  into  the  institutions  of  the  twentieth  century.  Glad- 
stone said  the  Politics  of  Aristotle  was  one  of  the  three  books  from 
which  he  had  learned  most. 

While  Plato  tacitly  accepted  slavery,  Aristotle  actively  defended 
the  institution  of  slavery,  describing  the  slave  as  an  "animated 
tool,"  and  insisting  that  slave  labor  was  necessary  in  order  that  the 
ruling  classes  might  have  the  leisure  for  statecraft,  art,  and  litera- 
ture. Both  Plato  and  Aristotle,  also,  fully  appreciated  the  advan- 
tages of  the  division  of  labor,  and  understood,  in  consequence, 
that  a  certain  amount  of  traffic  and  exchange  are  necessary.  But 
both  writers  shared  the  common  prejudice  against  trade  and  com- 
merce; what  one  man  gained  in  exchange,  they  thought,  some 
other  man  lost;  and  to  live  by  trade  was  in  their  eyes  despicable. 
Aristotle,  moreover,  defended  the  institution  of  private  property, 


660  OUTLINES   OF  ECONOMICS 

and  formulated  surprisingly  accurate  ideas  about  money  and  its 
functions;  but  he  condemned  interest  taking  because,  as  he  ex- 
pressed it,  money  is  barren. 

Perhaps  the  most  characteristic  quality  of  Greek  economic 
thought,  speaking  generally,  is  the  thorough  subordination  of  eco- 
nomic to  ethical  and  political  considerations.  The  object  of  life, 
in  their  view,  was  self-knowledge  or  self-realization,  not  the  acqui- 
sition of  riches,  and  they  refused  to  regard  wealth  as  an  object  of 
fundamental  importance  to  either  the  individual  or  the  State. 
Plato,  indeed,  in  certain  parts  of  his  writings,  defends  the  ascetic 
idea  that  human  wants  are  to  be  satisfied,  not  by  the  improvement 
of  productive  processes,  but  by  the  repression  of  those  wants  them- 
selves. 

The  Romans.  —  While  the  economic  institutions  of  the  Romans 
and  the  manifestations  of  their  character  in  their  economic  life 
will  repay  investigation,  they  were  not  remarkable  for  independent 
thought.  Their  economic  ideas,  like  their  philosophical  doctrines, 
were  borrowed  from  the  Greeks,  and  show  the  same  general  char- 
acteristics which  the  ideas  of  Plato  and  Aristotle  do.  Commerce 
and  trade  were  held  in  contempt,  particularly  when  carried  on  in  a 
small  way.  Interest  taking  was  by  some  thought  to  be  "as  bad 
as  murder."  Agriculture,  on  the  other  hand,  was  esteemed  to  be 
worthy  of  the  noblest  citizens,  and  a  "return  to  the  soil"  in  later 
Roman  times  was  frequently  recommended  as  a  cure  for  the  pre- 
vailing degeneracy.  Pliny  said  the  great  estates,  the  latif undid, 
together  with  slave  labor  and  the  destruction  of  the  small  inde- 
pendent farmer,  caused  the  downfall  of  Rome.  Among  other  agri- 
cultural problems  discussed  by  the  Romans  were  those  of  intensive 
versus  extensive  culture,  and  slave  versus  free  labor. 

The  jurists  are,  however,  the  most  important  of  all.  Whatever 
may  be  its  imperfections,  the  Roman  law,  the  corpus  juris  civilis, 
is  the  most  remarkable  legal  system  the  world  has  ever  seen  and 
for  training  in  careful  and  accurate  statement  is  unsurpassed. 
Probably,  as  a  training  for  economic  studies,  Roman  law  is  among 
the  most  valuable  branches  of  learning.  It  gives  us  also  invaluable 
information  about  the  economic  institutions  and  measures  of  Rome. 

Christianity.  —  To  the  economic  thought  of  the  time  Chris- 


HISTORY  OF  ECONOMIC  THOUGHT  661 

tianity  brought  the  revolutionary  ideas  of  the  honorableness  of 
toil  and  the  equality  of  men  before  God.  The  philosophy  of  the 
Stoics  had  brought  analogous  ideas  to  the  attention  of  the  re- 
stricted intellectual  world  of  the  day,  but  Christianity  popularized 
these  ideas.  The  clergy  were  encouraged  to  earn  their  livelihood 
by  manual  labor,  and  laymen  were  exhorted  to  free  their  slaves  as 
soon  as  they  had  become  Christians.  With  respect  to  money  and 
trade,  however,  the  effect  of  Christianity  was  to  strengthen  and  im- 
press the  teachings  of  Aristotle. 

The  Middle  Ages.  —  As  the  power  of  the  Church  increased,  its 
economic  ideas  found  more  formal  expression  in  the  treatises  of 
the  schoolmen  and  mediaeval  theologians  who  expounded  the 
church  or  canon  law.  Indeed,  in  the  corpus  juris  canonici  we 
have  a  definite  system  of  economic  thought  which,  while  it  was 
largely  theoretical  and  intended  originally  for  the  ecclesiastical 
courts,  came  in  time  to  be  widely  applied  in  secular  affairs  through 
the  power  of  the  confessional,  the  pulpit,  and  the  wide  jurisdiction 
of  the  ecclesiastical  courts. 

The  doctrines  of  the  canonists  were  derived,  in  part,  from  bib- 
lical injunctions  against  usury  and  the  pursuit  of  wealth.  The 
early  Christian  fathers  frequently  went  so  far  as  to  condemn  private 
property  and  set  up  the  ideal  of  communism  among  the  faithful. 
But  this  was  only  an  ideal,  and  private  property  was  early  recog- 
nized as  a  necessary  evil  resulting  from  the  fall  of  man.  This 
ideal,  however,  was  powerful  enough  to  keep  alive  the  doctrine 
that  the  maintenance  of  the  poor  was  not  a  matter  of  philanthropy, 
but  a  binding  obligation,  in  the  words  of  Thomas  Aquinas,  the 
most  distinguished  canonist,  a  debitum  legate. 

Following  the  philosophers  of  Greece  and  Rome,  and  in  sym- 
pathy with  the  scriptural  attitude  toward  wealth,  trade  and  com- 
merce were  regarded  as  greatly  inferior  to  agriculture  and  handi- 
work as  a  source  of  livelihood.  It  was  still  believed  that  what  the 
seller  made  by  trade  the  buyer  necessarily  lost.  As  commerce 
developed,  however,  trade  had  to  be  recognized  by  the  Church. 
In  doing  so,  the  canon  writers  formulated  the  doctrine  of  justum 
pretium,  that  every  commodity  has  a  just  price,  or  value,  which  it 
is  sinful  for  the  seller  to  exceed.  The  modern  trades-union  doc- 


662  OUTLINES   OF  ECONOMICS 

trine  of  a  fair  wage,  and  the  decisions  of  our  courts  concerning  rea- 
sonable charges  for  gas,  railway  services,  etc.,  illustrate  the  hold 
which  ethical  ideas  of  this  sort  have  even  at  the  present  time. 
According  to  a  very  general  idea,  the  just  price  of  an  article  is 
the  amount  required  to  enable  its  producer  to  live  in  accordance 
with  the  accepted  standard  of  living  of  his  class. 

The  next  most  important  economic  doctrine  of  the  canonists 
was  the  prohibition  of  usury,  which  originally  signified  any  inter- 
est, not  necessarily  excessive  interest,  on  a  loan.  The  argument 
against  interest  was  based  upon  scriptural  strictures  against  usury, 
and  upon  Aristotle's  argument  that  money  is  barren.  Interest 
taking  by  the  clergy  had  been  prohibited  as  early  as  the  fourth 
century;  but  in  1311,  at  the  Council  of  Vienna,  interest  was  pro- 
hibited " absolutely  and  universally,"  regardless  of  the  civil  law; 
and  by  the  middle  of  the  fourteenth  century,  the  prohibition  of 
interest  had,  in  many  places,  been  incorporated  into  the  civil  law. 
Little  by  little,  however,  the  Church  was  forced  to  change  its  atti- 
tude, and  in  the  middle  of  the  sixteenth  century  (1545)  a  statute 
was  passed  in  England  legalizing  an  annual  interest  rate  not  in 
excess  of  10  per  cent.  By  this  time  the  teachings  of  the  canonists 
were  fast  giving  way  to  the  doctrines  of  mercantilism. 

Economic  Ideas  in  Modern  Times.  —  Before  the  close  of  the 
sixteenth  century,  the  temporal  power  of  the  Church  had  been 
undermined  by  the  development  of  the  great  modern  monarchies, 
and  in  economic  thought  religious  considerations  were  replaced  by 
political  necessities.  The  problem  of  the  Church  —  the  universal 
establishment  of  the  Kingdom  of  God  upon  earth  —  gave  way  to  a 
newer  problem  —  the  maintenance  and  aggrandizement  of  rival 
states.  The  latter  were  in  pressing  need  of  ready  money  with 
which  to  build  navies  and  support  armies.  How  to  increase  public 
revenue  and  national  wealth  became  the  absorbing  questions  of 
the  time. 

Mercantilism.  — The  mercantile  system,  also  called  Colbert- 
ism,  restrictive  system,  and  commercial  system,  obtained  from 
the  early  part  of  the  sixteenth  century  until  late  in  the  eighteenth 
century,  and  its  influence  is  still  felt.  Mercantilism  is  not,  strictly 
speaking,  the  product  of  a  school  of  political  economists,  but 


HISTORY   OF  ECONOMIC  THOUGHT  663 

rather  the  name  given  to  that  economic  policy  of  statesmen  and  to 
those  detached  economic  views  of  writers  which  prevailed  during 
this  period.  Most  prominent  among  the  statesmen  who  were 
mercantilists  may  be  named  Colbert,  of  France,  Frederick  the 
Great,  of  Prussia,  and  Cromwell,  of  England.  Serra,  an  Italian, 
early  in  the  seventeenth  century,  presented  a  moderate  and  sys- 
tematic statement  of  their  views  in  a  work  entitled  A  Brief  Treatise 
on  Causes  which  make  Gold  and  Silver  abound  where  there  are 
no  Mines.  Thomas  Mun,  in  England,  a  generation  later,  wrote 
a  valuable  treatise  from  the  standpoint  of  the  mercantilists,  called 
England's  Treasure  by  Foreign  Trade:  or  the  Balance  of  our  Trade 
the  Rule  of  our  Treasure,  while  Sir  James  Steuart's  Inquiries  into 
the  Principles  of  Political  Economy,  published  in  1767,  may  be 
regarded  as  closing  the  development  of  the  theory  of  mercantilism. 

The  principal  characteristics  of  mercantilism  —  the  efforts  to 
increase  the  stock  of  precious  metals  within  the  country,  to  main- 
tain a  favorable  balance  of  trade,  to  increase  the  population  and 
foster  manufactures,  if  necessary  at  the  expense  of  agriculture  — 
have  been  described  elsewhere,  and  need  not  be  repeated  at  this 
point.  In  attempting  to  apply  these  theories,  however,  the  states- 
men of  this  epoch  instinctively  turned  to  that  instrument  —  the 
law  —  with  whose  use  they  were  most  familiar,  and  statutory 
restrictions  were  multiplied  until  mercantilism  in  one  sense  be- 
came practically  synonymous  with  governmental  interference. 
Toward  the  end  of  the  eighteenth  century,  however,  the  commer- 
cial position  of  England,  for  example,  became  so  strong  that  many 
of  her  industries  found  themselves  crippled  and  confined  by  the 
very  laws  which  had  protected  their  infancy,  and  a  reaction 
against  mercantilism  set  in.  The  reaction,  naturally,  took  the 
form  of  a  movement  in  favor  of  agriculture  and  against  govern- 
mental interference  in  economic  and  industrial  affairs.  In  obedi- 
ence to  the  needs  of  a  new  epoch,  political  economy  lent  itself  to  a 
propaganda  in  support  of  the  doctrine  of  industrial  liberty. 

The  Physiocrats.  —  The  reaction  against  mercantilism  found 
its  first  thorough  and  scientific  expression  at  the  hands  of  the 
French  Physiocrats.  Quesnay,  a  physician,  Gournay,  a  merchant, 
and  Turgot,  the  statesman,  are  their  three  principal  authors.  Po- 


664  OUTLINES   OF   ECONOMICS 

litically,  the  physiocrats  taught  the  doctrine  of  natural  laws  and 
rights,  and  as  a  consequence  loudly  proclaimed  the  maxim  of 
laissez-faire,  that  is,  that  the  government  should  not  interfere  with 
private  enterprise.  Economically,  they  exalted  the  importance 
of  agriculture,  and  maintained  that  manufactures  and  commerce, 
which  merely  change  the  form  or  position  of  raw  materials,  are 
barren  and  unproductive  (though  useful  when  subordinated  to 
agriculture) ;  but  that  agriculture  yields  a  net  surplus  —  produit 
net  —  over  and  above  the  expenses  of  production.  The  physio- 
crats must  thus  be  credited  with  originating  the  fertile  economic 
doctrine  of  surplus  value  —  a  reward  or  premium  appearing  in 
production  for  which  nature  rather  than  man  is  responsible,  and 
which  is  not  required  to  induce  men  to  put  forth  the  effort  neces- 
sary to  produce  wealth. 

Many  of  the  other  doctrines  of  the  physiocrats  follow  logically 
from  the  primacy  which  they  accorded  to  agriculture.  Since  agri- 
culture is  the  sole  ultimate  source  of  wealth,  they  maintained  that 
the  revenue  of  the  State  should  be  raised  by  a  single  direct  tax 
—  the  impdt  unique  —  levied  upon  land.  All  taxes  must,  they 
thought,  in  the  end  come  out  of  rent  anyway;  and  it  was  better 
that  the  landlord  should  pay  them  at  once  instead  of  waiting  until 
they  had  passed  through  five  or  six  hands  and  various  profits  had 
added  to  their  amount.  Naturally  the  physiocrats  were  ardent 
champions  of  free  trade.  They  encouraged  also  the  consumption 
of  agricultural  products,  "in  order  that  the  produit  net  might  be 
increased,"  and  were  generous  champions  of  the  importance  and 
rights  of  the  downtrodden  peasantry.  "  Pauvres  paysans,  pauvre 
royaume;  pauvre  royaume,  pauvre  roi,"  was  the  motto  of  Ques- 
nay's  Tableau  Economique,  the  most  important  treatise  of  the 
physiocratic  school. 

Adam  Smith.  —  In  1776  Adam  Smith  published  his  Inquiry 
into  the  Nature  and  Causes  of  the  Wealth  of  Nations,  the  most  influ- 
ential economic  treatise  ever  written.  "  The  life  of  almost  every- 
one in  England,  perhaps  of  everyone,"  said  Bagehot,  "is  different 
and  better  in  consequence  of  it."  His  writings  are  found  to  be 
very  similar  to  those  of  the  physiocrats,  but  further  developed  and 
modified  by  his  Scotch  training  and  habit  of  mind.  We  find  in 


HISTORY   OF  ECONOMIC  THOUGHT  665 

Adam  Smith  the  doctrines  of  free  trade,  non-interference,  and 
natural  laws,  yet  all  stated  more  guardedly.  Although  he  does 
not  regard  agriculture  as  exclusively  productive,  he  does  show  a 
partiality  for  agriculture,  for  in  this  branch  of  production,  he  says, 
nature  labors  along  with  man.  He  emphasized  the  importance  of 
permitting  each  individual  to  follow  his  own  self-interest  as  a 
means  of  promoting  national  prosperity,  but  he  was  not  unmindful 
of  the  existence  of  altruistic  motives  in  mankind.  He  accords  full 
recognition  to  the  motives  of  sympathy  and  kindness  in  his  Theory 
of  Moral  Sentiments.  But  the  net  result  of  Smith's  teaching  was 
to  strengthen  and  emphasize  the  laissez-faire  trend  of  economic 
thought  in  his  time.  "  Two  conceptions,"  said  Arnold  Toynbee, 
"are  woven  into  every  argument  of  the  Wealth  of  Nations,  the 
belief  in  the  supreme  value  of  individual  liberty,  and  a  conviction 
that  man's  self-love  is  God's  providence,  that  the  individual  in 
pursuing  his  own  interest  is  promoting  the  welfare  of  all." 

Economic  Thought  in  the  Nineteenth  Century.  —  The  Classical 
School.  —  The  economic  philosophy  which  prevailed  during  the 
first  half  of  the  nineteenth  century  is  variously  designated  as  the 
classical,  Ricardian,  English,  or  orthodox  school.  The  earlier 
authors  of  this  period  were  Jeremy  Bentham  (1738-1 842),  Thomas 
Robert  Malthus  (1766-1834),  David  Ricardo  (1772-1823),  James 
Mill  (1773-1836),  and  John  Ramsay  McCulloch  (1770-1864). 
In  all  of  these  writers  we  find  the  utilitarian  philosophy,  a  deduct- 
ive method,  and  the  feeling  that  the  outlook  for  the  mass  of  the 
laborers  was  not  a  hopeful  one.  They  elaborated  economic  prin- 
ciples, supposed  to  be  good  for  all  times  and  places,  with  the  posi- 
tiveness  that  one  expects  to  find  only  in  the  mathematical  or 
physical  sciences. 

Bentham's  great  work  was  the  formulation  and  propaganda  of 
the  utilitarian  philosophy,  with  its  famous  first  principle  or  goal 
of  social  action  —  the  greatest  happiness  of  the  greatest  number. 

Malthus' s  principal  contribution,  contained  in  his  celebrated 
work,  The  Theory  of  Population,  has  already  been  discussed. 
While  Malthus  was  himself  a  particularly  charitable  and  benevo- 
lent friend  of  the  working  classes,  his  doctrine  of  population  con- 
tributed more  than  any  other  single  thing  to  make  the  political 


666  OUTLINES   OF  ECONOMICS 

economy  of  the  Classical  School  harsh  and  gloomy.  It  seemed 
to  say  that  although  wages  were  low  they  could  be  no  higher, 
because  if  by  some  fortunate  chance  wages  increased,  population 
was  sure  to  multiply  until  the  wage  was  forced  back  to  the  old 
level.  Poor  relief  and  trades-union  activities  were  both  useless. 
The  woe  of  the  poor  was  due  to  their  own  lack  of  foresight,  and 
could  be  removed  by  the  poor  alone.  It  was  taught  "that  he  who 
brought  children  into  the  world  without  adequate  provision  for 
them  should  be  left  to  the  punishment  of  nature."  The  responsi- 
bility of  poverty  was  thus  thrust  upon  the  poor  themselves;  the 
rich  were  soothed  with  the  assurance  that  they  were  not  primarily 
responsible  for  the  condition  of  affairs;  and  political  economy 
was  diverted  from  the  consideration  of  its  truest  problem  —  the 
amelioration  of  poverty  —  to  a  discussion  of  the  problems  con- 
nected with  capital  and  trade.  The  importance  of  the  Malthusian 
proposition  in  economic  philosophy  in  the  first  half  of  the  nine- 
teenth century  can  scarcely  be  exaggerated. 

Ricardo  was  perhaps  the  first  economist  who  adequately  realized 
the  importance  of  the  problem  of  the  distribution  of  wealth.  The 
backbone  of  his  distributive  system  was  the  Malthusian  propo- 
sition. Ricardo  believed  that  as  population  increased,  society 
would  be  forced  to  resort  to  poorer  and  poorer  soils  in  order  to 
obtain  food;  and  as  this  took  place  an  increasing  share  of  the 
product  of  industry  would  go  to  the  landlord  in  the  shape  of  eco- 
nomic rent.  The  division  of  the  remaining  product  between  labor 
and  capital,  in  Ricardo's  view,  was  determined  largely  by  the  "iron 
law  of  wages";  that  is  to  say,  the  laborer  would  receive  enough  to 
purchase  the  necessaries  and  conveniences  required  to  support 
him  and  his  family  in  their  customary  style  of  living,  while  the 
residue  would  go  to  capital  in  the  form  of  interest  and  profits. 
Profits  were  thus  the  "leavings  of  wages."  With  the  passage  of 
time  and  the  settlement  of  a  country,  then,  Ricardo's  theory  of 
distribution  taught  that  rent  would  absorb  a  larger  and  a  larger 
share  of  the  product,  wages  about  the  same  amount,  while  profits 
would  dwindle  both  absolutely  and  relatively. 

Ricardo's  principal  work  is  called  Principles  of  Political 
Economy  and  Taxation.  It  was  published  in  1817,  and  in  it 


HISTORY   OF  ECONOMIC  THOUGHT  667 

Ricardo  elaborates,  although  he  did  not  originate,  the  usually  re- 
ceived doctrine  of  rent,  which,  modified  and  developed,  is  the  one 
presented  in  this  book.  His  ideas  in  general  have  a  markedly 
pessimistic  tinge.  Rent,  he  said,  is  due  to  the  niggardliness,  not 
to  the  bounty,  of  nature;  and  his  theory  of  distribution  emphasized 
the  natural  diversity  of  interest  between  wage  receivers  and  profit 
makers,  and  the  antagonism  between  the  interests  of  landowners 
and  all  other  classes  of  society.  Personally  he  was  a  kind  man, 
and  sincerely  devoted  to  the  advancement  of  humanity.  Ricardo 
is  remarkable  for  his  extreme  development  of  the  abstract  deduct- 
ive method,  and  it  is  noteworthy  that  this  development  is  not  in 
the  writings  of  a  professional  scholar,  but  in  the  work  of  one  of 
the  most  successful  bankers  and  brokers  of  his  day.  Socialists 
claim  that  developing  still  farther,  or  to  their  logical  outcome,  the 
teachings  of  Ricardo,  they  arrive  at  socialism. 

John  Stuart  Mill,  who  lived  from  1806-1873,  closed  one  period 
in  the  development  of  economic  science  and  began  another  in  Eng- 
land. He  started  as  a  thoroughgoing  follower  of  Ricardo,  pre- 
served the  old  doctrines  of  value,  rent,  and  profits,  and  advocated 
laissez-faire  as  a  general  principle  of  political  expediency.  But 
in  his  later  years  Mill  advocated  the  diffusion  of  property  through 
the  regulation  and  taxation  of  inheritances,  indorsed  the  appro- 
priation by  the  State  of  the  future  unearned  increment  of  land,  and 
emphasized  an  important  distinction  between  the  production  and 
distribution  of  wealth.  "  The  laws  and  conditions  of  the  produc- 
tion of  wealth,"  he  said,  "partake  of  the  nature  of  physical  truths. 
There  is  nothing  optional  or  arbitrary  in  them.  ...  It  is  not  so 
with  the  distribution  of  wealth.  That  is  a  matter  of  human  insti- 
tutions solely.  The  things  once  there,  mankind,  individually  or 
collectively,  can  do  with  them  as  they  like.  .  .  .  The  distribution 
of  wealth,  therefore,  depends  upon  the  laws  and  customs  of  society. 
The  rules  by  which  it  is  determined  are  what  the  opinions  and 
feelings  of  the  community  make  them,  and  are  very  different  in 
different  ages  and  countries;  and  might  be  still  more  different,  if 
mankind  so  chose." 

The  old  and  the  new  doctrines  found  in  Mill's  Principles  of 
Political  Economy  do  not  harmonize,  however,  and  the  result  is  a 


668  OUTLINES  OF  ECONOMICS 

work  one  of  the  most  valuable  of  modern  times,  yet  full  of  incon- 
sistencies. Nevertheless,  Mill  will  always  be  regarded  as  the 
culmination  of  the  school  usually  known  as  the  English  deduct- 
ive or  classical  school.  Most  of  the  work  of  the  school  was  deduct- 
ive; that  is,  they  reasoned  by  singling  out  a  few  main  facts  of  the 
external  physical  world  and  human  nature  familiar  to  all,  and 
showing  how  men  must  act  under  the  guidance  of  these  laws. 
None  of  these  economists  pretended  that  the  few  laws  which  they 
considered  were  the  whole  of  human  nature,  though  they  have 
sometimes  been  interpreted  as  if  they  did  so;  but  they  thought  that 
the  great  multitude  of  motives  which  influenced  men  were  too 
complex  to  be  analyzed,  and  only  one  or  two  (chiefly  self-interest) 
could  "be  reduced  to  any  assignable  law."  It  is  plain  that  such  a 
system  of  economics  was  highly  ideal  and  never  realized  in  actual 
life.  The  exceptions  to  its  rules  seemed  more  numerous  than  the 
cases  to  which  the  rules  applied.  Men  could  not  long  be  content 
with  an  economics  which  told  them  one  thing,  while  life  constantly 
told  them  something  different,  and  often  very  different.  The  result 
was  a  reaction  toward  a  fuller  recognition  of  the  real  facts  of  life. 
Socialism.  — Mill's  change  of  heart  resulted  partly  from  his 
study  of  the  socialist  writers,  who  voiced  the  earliest  and  most 
thoroughgoing  protest  against  the  views  of  the  classical  economists. 
Modern  socialistic  doctrine  may  conveniently  be  dated  from 
William  Godwin's  Inquiry  concerning  Political  Justice,  the  first 
edition  of  which  appeared  in  1793.  Godwin  and  the  early  French 
idealists  and  communists  —  Cabet,  Saint-Simon,  Fourier,  etc., — 
began  the  attack  on  the  ethical  and  political  views  of  the  orthodox 
political  economy.  Later  the  attack  was  continued  in  a  some- 
what more  practical  and  realistic  way  by  writers  such  as  Wil- 
liam Thompson  and  Robert  Owen  in  England,  Bazard  and  Louis 
Blanc  in  France,  Rodbertus,  Lasalle,  and  Marx  in  Germany.  The 
foundation  of  classical  political  economy  was  laissez-faire,  and  its 
doctrinal  structure  was  built  around  the  system  of  private  capi- 
talistic enterprise.  Socialism  in  essence  was  a  thorough  protest 
against  laissez-faire  and  the  private  ownership  of  property. 
Pierre  LeRoux  used  the  word  "socialism"  in  1838*  with  the 
very  purpose  of  expressing  the  antithesis  of  individualism. 

1  It  was  used  before  this  in  England  by  the  followers  of  Robert  Owen. 


HISTORY   OF   ECONOMIC   THOUGHT  669 

In  recent  times,  largely  under  the  influence  of  Karl  Marx, 
socialism  has  acquired  a  distinctive  economic  theory  of  its  own. 
Marx,  in  his  work  on  Capital,  is  apparently  as  abstract,  deductive, 
and  pessimistic  as  any  of  the  classical  school,  but  at  bottom  his 
whole  theory  was  directed  against  those  fundamental  institutions 
of  our  social  order  which  the  classical  economists  took  for  granted. 
Marx  has  been  credited  by  some  as  the  discoverer  of  the  material- 
istic or  economic  interpretation  of  history,  and  the  whole  tendency 
of  the  modern  scientific  socialists  has  been  to  emphasize  the  evo- 
lutionary standpoint. 

The  Sociologists.  —  Among  other  influences  which  broadened 
Mill's  conception  of  economic  science,  and  induced  him  to  temper 
the  rigor  of  his  early  teachings,  were  the  works  of  Auguste  Comte 
(1798-1857),  the  founder  of  modern  sociology.  Comte  was  espe- 
cially severe  in  his  criticism  of  the  methods  of  the  classical  econo- 
mists. He  denied,  in  particular,  that  it  is  possible  to  develop  a 
helpful  science  of  economics  distinct  from  history,  ethics,  and 
politics.  Not  only  must  these  fields,  he  maintained,  be  cultivated 
in  common,  but  the  work  must  be  done  by  inductive,  as  distinct 
from  deductive,  methods.  To  the  classical  assumption  that  a  uni- 
versal science  of  economics  could  be  formulated,  true  for  all 
times  and  places,  he  opposed  the  theory  that  there  is  in  society  an 
ordered  change  or  evolution,  and  that  the  capitalistic  stage,  to 
which  the  classical  economics  conformed,  must  be  studied  in  con- 
nection with  the  past  and  the  future.  Economics,  he  particularly 
insisted,  cannot  be  divorced  from  history. 

The  Historical  School.  —  This  particular  line  of  thought  was 
taken  up  in  Germany  about  1850  by  three  young  Germans, 
Roscher,  Knies,  and  Hildebrand,  who  vigorously  assailed  the  doc- 
trines of  the  classical  school.  They  went  back  to  the  old  premises 
—  self-interest,  private  property,  demand,  and  supply  —  and 
traced  out  the  historical  development  of  economic  life,  coming  to 
the  conclusion  that  economic  policies  were  not  absolutely,  but  only 
relatively,  true.  They  denied  that  economic  science  can  discover 
laws  which  hold  true  for  all  times  and  all  places.  They  empha- 
sized the  importance  of  the  inductive  method,  of  minute  investiga- 
tions into  facts,  and  the  study  of  legal  institutions,  custom,  and 


670  OUTLINES   OF  ECONOMICS 

ethics  in  their  relation  to  economic  life,  while  most  members  of  the 
school  entertained  a  strong  sympathy  for  state  policies  of  reform. 
Among  the  later  writers  of  this  group  we  may  mention  especially 
Gustav  Schmoller. 

Owing  to  the  political  ferment  in  Germany  during  the  infancy 
of  the  historical  school  and  the  formation  of  the  German  Empire 
when  this  reaction  against  the  classical  economists  was  at  its  height, 
German  political  economy  of  the  last  half  of  the  nineteenth  century 
was  impregnated  with  a  striking  nationalistic  spirit  which  sepa- 
rated it  even  further  from  the  cosmopolitanism  of  the  English 
writers.  The  creation  of  a  new  state  is  almost  invariably  attended 
by  the  enactment  of  restrictive  legislation,  looking  to  the  amalga- 
mation of  the  diverse  elements  incorporated  into  the  new  state 
and  the  protection  of  its  industries  from  foreign  competition. 
Laissez-faire,  under  these  conditions,  is  particularly  difficult 
to  maintain.  The  *new  national  economy  of  Germany  seemed  to 
voice  these  political  necessities.  Like  the  classical  economy  of  Eng- 
land, it  was  a  creature  of  its  own  time  and  its  own  environment. 

The  Economic  Optimists.  —  The  classical  English  economists 
have  often  been  called  pessimists.  This  is  too  strong  a  term,  in- 
asmuch as  they  all  saw  hope  for  improvement.  What  can  be  said 
is  that  they  developed  pessimistic  tendencies.  Take  it  as  we  will, 
the  Malthusian  doctrine  of  population  is  tinged  with  pessimism, 
and  so  also  are  the  Ricardian  ideas  of  the  action  of  nature  as  seen 
in  the  rent  of  land  and  in  his  scheme  of  distribution.  In  oppo- 
sition to  English  economists,  there  was  developed  elsewhere,  about 
the  middle  of  the  nineteenth  century,  a  scheme  of  thoroughgoing 
economic  optimism,  and  this  was  presented  in  a  more  unqualified 
way  by  Frederic  Bastiat  (1801-1850),  than  by  any  one  else;  so 
much  so  that  economic  optimism  at  once  brings  to  the  mind  of  any 
economist  familiar  with  the  history  of  economic  thought  the  name 
of  Bastiat.  An  ardent  agitator  for  free  trade  and  a  popular  pleader 
for  the  existing  order  against  the  attacks  of  socialists  and  anarchists, 
he  was  the  author  of  numerous  pamphlets,  and  at  the  time  of  his 
death  was  engaged  on  a  systematic  treatise  entitled  Economic 
Harmonies  (Harmonies  Economique),  of  which  the  first  volume 
only  was  completed.  According  to  Bastiat,  there  is  no  such  thing 


HISTORY   OF  ECONOMIC  THOUGHT  671 

as  economic  rent.  Consequently,  the  landowner  is  not  the  recipi- 
ent of  an  unearned  income.  What  we  call  rent  is  simply  a  return 
for  past  investments  of  capital.  The  profits  on  capital  also,  accord- 
ing to  him,  are  simply  a  return  on  past  labor,  and  relatively  towages, 
a  diminishing  return.  For  it  is  a  peculiarity  of  labor  stored  up  in 
those  products  which  we  call  capital,  that  it  continually  diminishes 
in  value  as  compared  with  present  labor.  In  other  words,  wages 
are  continually  gaining  relatively  as  compared  with  the  profits  of 
capital.  Capital  may  gain  absolutely  on  account  of  the  increase 
in  the  amount  of  capital.  Wages  gain  both  absolutely  and  rela- 
tively. Value  gives  us  the  ratio  of  exchange  between  services. 
Economic  gain  is  in  proportion  to  economic  service  only  that  labor 
is  progressively  a  gainer  on  account  of  the  fact  that  man's  present 
services  (as  seen  in  labor)  increase  in  value  as  compared  with 
man's  past  services  as  accumulated  in  capital.  To  give  a  con- 
crete illustration,  the  handle  of  an  ax  would  be  capital  —  the  re- 
sult of  stored-up  past  labor.  It  is  likely  to  diminish  in  value  con- 
tinually when  expressed  in  terms  of  present  labor  services,  because 
men  are  continually  learning  how  to  make  better  and  better  ax 
handles. 

As  Bastiat  denied  the  existence  of  pure  economic  rent  in  the 
Ricardian  sense,  he  also  denied  the  Malthusian  theory  of  popula- 
tion, holding  that  no  proof  could  be  adduced  of  a  tendency  of  popu- 
lation to  press  upon  the  means  of  subsistence.  The  evils  that  we 
experience  come,  according  to  Bastiat,  from  man's  interference 
with  natural  harmonies.  Nature  works  things  out  well,  and  this 
is  the  best  of  possible  worlds  if  we  would  only  let  nature  have  her 
way. 

Henry  C.  Carey,  the  American  contemporary  of  Bastiat,  held 
similar  doctrines,  and  was  apparently  the  more  original  man.  If 
either  one  borrowed  from  the  other,  it  must  have  been  Bastiat. 
Probably  neither  one  was  guilty  of  any  conscious  plagiarism. 
Carey,  however,  was  not  so  good  a  representative  of  economic 
optimism  as  Bastiat,  because  Carey  believed  that  a  protective 
tariff  was  a  necessity,  and  this  implied  the  necessity  of  social  action 
to  establish  a  system  of  economic  harmonies.  Carey's  general 
views  otherwise  are  treated  below. 


672  OUTLINES   OF  ECONOMICS 

The  writings  of  the  optimists  had  a  considerable  influence  for  a 
time  in  Germany,  where  they  were  developed  and  applied  with 
uncompromising  logic  by  men  like  Prince-Smith,  Faucher,  and  a 
considerable  number  of  others  who  were  influential  in  the  press 
and  practical  affairs  rather  than  in  academic  life.  In  the  United 
States  these  writings  have  had  a  great  deal  of  influence  upon  a 
number  of  early  writers,  among  whom  we  may  mention  especially 
the  late  Arthur  Latham  Perry,  long  professor  in  Williams  College, 
and  Edward  Atkinson,  the  well-known  statistician  and  writer  of 
Boston. 

Early  American  Economists.  —  The  reaction  against  the  Eng- 
lish economists,  it  is  interesting  to  note,  began  earlier  in  the  United 
States  than  in  England  or  Germany.  In  the  early  part  of  the 
nineteenth  century,  emphatic  dissent  from  the  English  doctrines  was 
voiced  by  a  group  of  publicists,  among  whom  may  be  mentioned 
Alexander  Hamilton,  Daniel  Raymond,  Matthew  Carey,  Hezekiah 
Niles,  and  Frederick  List.  Hamilton's  work  and  views  are  well 
known;  Niles  and  Matthew  Carey  were  pamphleteers  of  consider- 
able note  in  the  first  third  of  the  nineteenth  century;  and  List, 
who,  in  the  view  of  some  authorities,  planted  the  seeds  of  the 
German  historical  school,  unquestionably  obtained  his  distinctive 
nationalistic  views  about  political  economy  in  the  United  States, 
and  first  formulated  them  in  his  Outlines  of  American  Political 
Economy,  published  in  1827.* 

Daniel  Raymond,  however,  of  all  the  American  writers  noted, 
is  the  least  known,  and  yet  the  author  of  the  first  American  treatise 
on  political  economy  in  which  a  distinctively  American  system  of 
economic  thought  is  suggested.  Raymond's  first  book,  Thoughts 
on  Political  Economy,  appeared  in  1820;  a  second  edition,  under 
the  title  Elements  of  Political  Economy,  appeared  in  1823,  and  the 
latter  was  reprinted  with  slight  changes  in  1836  and  1840.  The 
essence  of  Raymond's  system  is  found  in  his  conception  of  wealth. 
Wealth,  he  maintained,  is  not  an  aggregate  of  exchange  values 
but  the  opportunity  to  acquire  the  material  comforts  of  life  by 

1  List  returned  to  Germany  and  was  there  a  forceful  writer  and  agitator  for 
German  unity,  and  is  identified  rather  with  the  history  of  economic  thought  of 
Germany  than  with  that  of  the  United  States. 


HISTORY  OF  ECONOMIC  THOUGHT  673 

labor.  The  English  political  economy,  in  Raymond's  view,  was 
a  study  of  private  as  opposed  to  political  or  national  economy. 
Raymond  emphasized  the  distinction  between  individual  and 
social  wealth,  and  maintained  that  the  laws  of  wealth  laid  down 
by  Adam  Smith  were  untrue  of  a  nation  conceived  as  a  unit.  The 
interests  of  particular  individuals,  or  particular  classes,  he  argued, 
do  not  always  coincide  with  the  interests  of  the  nation  as  a  whole, 
and  the  latter,  he  concluded,  will  be  best  advanced  by  developing 
all  the  national  powers  to  their  widest  possible  extent.  He  was 
thus  a  warm  advocate  of  protection  as  opposed  to  laissez-faire. 

Raymond's  views  had  so  impressed  Matthew  Carey  that  he 
offered  to  support  a  chair  of  political  economy  at  the  University  of 
Maryland  if  the  University  would  permit  Raymond  to  fill  it.  Mat- 
thew Carey's  son,  Henry  C.  Carey  (1793-1879),  by  far  the  most 
influential  of  the  early  American  economists,  was  in  like  manner 
probably  influenced  by  the  teachings  of  Raymond.  Carey  was 
not  only  an  earnest  champion  of  protection,  but  an  indefatigable 
critic  of  classical  economic  doctrines.  He  denied  the  truth  of 
the  Malthusian  principle  and  the  law  of  diminishing  returns; 
objected  to  the  Ricardian  theory  of  rent;  and  maintained  that  the 
value  of  a  commodity  depends  upon-  the  cost  of  reproduction 
rather  than  the  cost  of  production,  as  was  laid  down  in  the  classi- 
cal theory  of  value.  Carey  entertained  a  concept  of  wealth  very 
similar  to  that  of  Raymond,  and  in  some  parts  of  his  work  adopted 
methods  of  investigation  which  brought  him  in  close  touch  with 
the  sociologists  and  the  German  historical  economists.  The  key- 
stone of  his  economic  system  is  the  doctrine  of  association.  The 
increasing  mastery  of  man  over  nature,  or  the  increase  of  wealth, 
Carey  held  to  be  dependent  upon  the  increasing  efficiency  resulting 
from  a  compact,  homogeneous  population,  in  which  agriculture 
and  manufacture  are  conducted  side  by  side,  in  which  the  home 
market  idea  is  carried  out  in  the  most  complete  way,  and  in  which, 
to  be  brief,  the  association  of  industrial  and  social  units  is  most 
intense  and  intimate.  It  can  be  readily  understood  why  the  eco- 
nomic philosophy  of  Carey  was  so  inimical  to  free  trade  at  every 
point. 

The  Austrian  School.  — The  protests  against  the  classical  econo- 

91 


674  OUTLINES   OF  ECONOMICS 

mists  which  we  have  been  considering  were  directed  largely 
against  the  narrow  scope  and  deductive  methods  of  the  classical 
school.  The  Austrian  economists  represent  a  reaction  not  against 
their  methods,  but  against  the  conclusions,  and  particularly  against 
the  theory  of  value  of  the  classical  school.  The  great  contribution 
of  the  Austrian  school  is  the  marginal  utility  theory  of  value  which 
has  been  most  assiduously  applied  in  economic  analysis  by  a  group 
of  Austrian  economists,  among  whom  may  be  mentioned  Pro- 
fessor Menger,  Wieser,  Sax,  and  Bohm-Bawerk.  But  the  marginal 
utility  theory  of  value  was  advanced  almost  simultaneously,  about 
1871,  by  the  English  economist  Jevons,  the  Austrian  economist 
Menger,  and  the  Swiss  economist  Walras.1 

The  Austrians  have  been  a  leading  force  in  producing  what  is 
not  inaptly  termed  a  renaissance  in  theory,  although,  as  stated, 
they  indorsed  the  deductive  and  abstract  methods  of  the  classical 
economists.  The  classical  theory  put  the  emphasis  upon  supply 
or  the  conditions  of  supply,  maintained  that  cost  of  production 
determines  value,  and  found  the  ultimate  measure  and  explanation 
of  value  in  the  pain  and  sacrifice  of  labor.  The  Austrians  main- 
tain that  utility,  the  pleasure  or  satisfaction  derived  from  con- 
sumption, is  the  ultimate  cause  and  measure  of  value;  they  empha- 
size demand  as  the  English  economists  emphasized  supply;  and 
hold  that  value  determines  cost  of  production  and  not  the  cost 
of  production,  value.  Capital,  they  conclude,  receives  its  value 
from  the  finished  product  instead  of  giving  value  to  that  product. 
The  work  of  this  school  has  tended  to  put  the  consumer  in  the  place 
primarily  occupied  by  the  capitalist  as  the  center  of  discussion  in 
economic  theory. 

Present  Condition  of  Economic  Thought.  —  The  net  effect  of  all 
these  protests  against  the  classical  English  economists  has  been 
to  introduce  a  welcome  catholicity  into  the  methods  of  economic 
investigation.  The  historical  school  emphasized  the  evolutionary 
standpoint  and  the  necessity  of  minute  investigation  of  the  facts 
of  industrial  life,  while  the  work  of  the  Austrians  operated  to 

1  In  reality  the  marginal  utility  theory  had  been  explained  many  years  before 
this  by  a  number  of  obscure  writers  whose  ideas,  however,  never  affected  the 
main  current  of  economic  thought. 


HISTORY   OF   ECONOMIC  THOUGHT  675 

strengthen  and  explain  the  necessary  place  of  deduction  in  eco- 
nomic analysis.  To-day  the  ordinary  economist  employs  either 
method,  or  both,  as  the  subject-matter  demands,  and  the  contro- 
versy about  methods  has  become  a  thing  of  the  past.  With  respect 
to  the  theory  of  value,  neither  supply  nor  demand,  neither  cost  nor 
utility,  neither  the  capitalist  nor  the  consumer,  is  now  said  to  exert 
a  predominating  influence  in  the  determination  of  values.  The 
Austrian  school,  it  is  now  understood,  supplied  a  needed  correct- 
ive without  revolutionizing  the  earlier  theory  of  value.  The  Aus- 
trians  themselves  are  seen  to  have  been  guilty  of  laying  exaggerated 
emphasis  upon  the  consumer's  influence  upon  value  and  price.1 

So,  similarly,  with  respect  to  the  scope  of  economics.  The 
attempt  of  the  classical  economists  to  isolate  an  "economic  man" 
ruled  entirely  by  an  enlightened  self-interest  and  unaffected  by 
political,  ethical,  and  humanitarian  impulses,  is  recognized  to  have 
been  a  mistake.  But  economics  has  never  given  itself  to  a  com- 
plete study  of  politics  or  ethics.  It  considers  ethical  and  political 
phenomena  when  these  cannot  be  dissociated  from  economic 
phenomena,  but  insists,  nevertheless,  upon  the  separation  of  eco- 
nomics from  ethics,  politics,  and  sociology.  We  recognize  that 
these  fields  are  not  wholly  or  clearly  differentiated,  but  we  recog- 
nize just  as  clearly  that  a  division  of  labor  is  necessary  if  accurate 
results  are  to  be  achieved.  Furthermore,  this  division  of  labor  is 
showing  itself  progressively  within  the  limits  of  economics  itself, 
as  it  has  shown  itself  in  all  growing  sciences.  Indeed,  the  present 
condition  of  economic  thought  was  so  accurately  predicted  by 
Professor  Jevons  in  1876,  that  his  words  —  written  in  the  midst  of 
the  controversy  among  the  adherents  of  the  deductive,  historical, 
mathematical,  and  sociological  methods  of  investigation  —  may 
well  be  employed  to  picture  the  condition  of  the  science  of  eco- 
nomics as  it  exists  to-day:  — 

"As  I  have  previously  explained,  the  present  chaotic  state  of 
economics  arises  from  the  confusing  together  of  several  branches 
of  knowledge.  Subdivision  is  the  remedy.  We  must  distinguish 
the  empirical  element  from  the  abstract  theory,  from  the  applied 

1  And  there  is  reason  to  believe  that  their  analysis  was  based  in  some  degree 
upon  a  faulty  psychology. 


676  OUTLINES   OF   ECONOMICS 

theory,  and  from  the  more  detailed  art  of  finance  and  administra- 
tion. Thus  will  arise  various  sciences,  such  as  commercial  sta- 
tistics, the  mathematical  theory  of  economics,  systematic  and 
descriptive  economics,  economic  sociology,  and  fiscal  science. 
There  may  even  be  a  kind  of  cross  subdivision  of  the  sciences; 
that  is  to  say,  there  will  be  division  into  branches  as  regards  the 
subject,  and  division  according  to  the  manner  of  treating  the 
branch  of  the  subject.  The  manner  may  be  theoretical,  empirical, 
historical,  or  practical;  the  subject  may  be  capital  and  labor, 
currency,  banking,  taxation,  land  tenure,  etc.,  —  not  to  speak  of 
the  more  fundamental  division  of  the  science  as  it  treats  of  con- 
sumption, production,  exchange,  and  distribution  of  wealth.  In 
fact,  the  whole  subject  is  so  extensive,  intricate,  and  diverse,  that 
it  is  absurd  to  suppose  it  can  be  treated  in  any  single  book,  or  in 
any  single  manner."  1 

QUESTIONS 

What  were  the  economic  doctrines  of  the  canonists? 
How  did  the  physiocrats  differ  from  the  mercantilists? 
What  is  Adam  Smith's  relation  to  the  physiocrats? 
Characterize  the  "classical"  school. 
How  did  Ricardo  use  the  Malthusian  proposition  ? 

6.  In  what  respect  is  Mill's  thought  a  turning  point  in  economic  theory? 

7.  How  is  the  socialist  thought  related  to  the  theories  of  the  classical 
writers  ? 

8.  In  what  did  the  protest  of  the  historical  school  against  the  classical 
school  consist? 

9.  Characterize  the  economic  thought  of  Bastiat? 

10.   What  are  the  characteristics  of  the  Austrian  school? 

REFERENCES 

ASHLEY,  W.  J.     Introduction  to  English  Economic  History  and  Theory. 
CANNAN,  E.     History  of  Theories  of  Production  and  Distribution. 
INGRAM,  J.  K.     History  of  Political  Economy. 
PALGRAVE,  R.  H.  I.     Dictionary  of  Political  Economy  (articles  on  various 

economists). 
PRICE,  L.  L.     History  of  Political  Economy  in  England. 

1  Jevons,  Theory  of  Political  Economy,  3d  ed.,  pp.  xv-rvi. 


APPENDIX   A 

STATISTICS    OF   PUBLIC   EXPENDITURES 

It  will  be  observed  that  the  payments  in  Table  II  are  larger  than  in 
Table  I.  This  is  because,  as  regards  Table  I,  subtractions  have  been  made 
of  certain  items  as  follows  :  — 

(1)  Payments  on  account  of  the  public  debt; 

(2)  premiums  on  bonds  purchased  and  exchanged ; 

(3)  internal  revenue  and  customs  rebates  and  other  funds  ; 

(4)  interest  on  bonds  of  Pacific  railroads  ; 

(5)  District  of  Columbia  expenditures  (agency  account) ; 

(6)  Soldiers'  Home  permanent  fund  (transfer). 

The  exclusion  of  these  payments  removes  from  the  aggregate  the  greater 
portion  of  those  which  under  the  census  classification  are  designated  tem- 
porary and  transfer. 

Table  III,  giving  the  expenditures  of  the  principal  divisions  of  the  United 
States,  helps  us  to  understand  the  activities  of  the  various  main  parts  of 
the  United  States  as  revealed  in  public  expenditures  ;  and  it  also  helps 
us  to  understand  the  character  and  degree  of  evolution  in  the  various 
parts  of  the  country,  and  the  height  to  which  civilization  has  ascended  in 
these  parts,  although  here,  again,  the  student  must  be  cautioned  that  in 
public  expenditures  we  have  only  one  of  many  indications  of  the  nature 
and  growth  of  civilization,  yet  one  of  the  most  important. 

North  Atlantic  division  includes:  New  England  and  Southern  North  Atlantic 
States. 

New  England  includes:  Maine,  New  Hampshire,  Vermont,  Massachusetts, 
Rhode  Island,  Connecticut. 

Southern  North  Atlantic  includes:  New  York,  New  Jersey,  Pennsylvania. 

Northern  South  Atlantic  includes :  Delaware,  Maryland,  District  of  Columbia, 
Virginia,  West  Virginia. 

Southern  South  Atlantic  includes:  North  Carolina,  South  Carolina,  Georgia, 
Florida. 

Eastern  North  Central  includes :  Ohio,  Indiana,  Illinois,  Michigan,  Wisconsin. 

Western  North  Central  includes:  Minnesota,  Iowa,  Missouri,  North  Dakota, 
South  Dakota,  Nebraska,  Kansas. 

Eastern  South  Central  includes :  Kentucky,  Tennessee,  Alabama,  Mississippi. 

Western  South  Central  includes:  Louisiana,  Arkansas,  Indian  Territory, 
Oklahoma,  Texas. 

Rocky  Mountain  includes:  Montana,  Idaho,  Wycming,  Colorado,  New 
Mexico. 

Basin  and  Plateau  includes:  Arizona,  Utah,  Nevada. 

Pacific  includes :  Washington,  Oregon,  California. 

677 


678 


APPENDIX  A 


TABLE   I 

SUMMARY  OF  PAYMENTS  FOR  EXPENDITURES  OF  THE  NATIONAL  GOVERN- 
MENT, STATES  AND  TERRITORIES,  COUNTIES,  CITIES,  AND  OTHER 
MINOR  CIVIL  DIVISIONS  OF  CONTINENTAL  UNITED  STATES  :  1902 


GROSS  PAYMENTS 


Total  

$1   Til  O77  222 

National  government  

6l7,=;'?O  137 

States  and  territories  

185  764  2O  2 

Counties  

IO7  2(Sc  827 

Cities  containing  over  25,000  inhabitants  

d68  6?7  7AO 

Cities  containing  over  8000  and  less  than  25,000  inhabit- 
ants   

Other  minor  civil  divisions  (estimated)  

222  082  884 

Duplications  amount  to  

Payments  less  duplications  

$1   7O4  1  2O  060 

APPENDIX   A 


679 


TABLE   II 

PAYMENTS  AND  BALANCES  OF  THE  NATIONAL  GOVERNMENT  FOR  THE 
YEAR  ENDING  JUNE  30,  1903 


Total  payments  and  balance  on  hand  at  close  of  year  ....     $2,566,878,140 

Balance  on  hand  at  close  of  year 1,310,006,031 

Total  payments 1,256,872,109 

Payments  for  : 

Congress 4,764,578 

Library  of  Congress 590,668 

Executive  departments 13,822,313 

Foreign   intercourse 3,204,522 

Collection  of  internal  revenue 4,496,479 

Customs  service 10,210,747 

Government  Printing  Office 5,917,410 

Judiciary 7>35°.74° 

Territorial  governments 261,591 

Buildings  and  sites  (outlays) 6,610,475 

Military  establishment 98,286,299 

Naval  establishment 55>95°>93° 

Increase  of  the  navy  (outlays) 26,667,104 

Life-saving  service 1,746,841 

Light-house  establishment 4>537F3i6 

Public  Health  and  Marine-Hospital  Service 1,356,456 

Harbor  and  river  improvements  (outlays) 19,590,082 

Indians 12,935,168 

Pensions 138,425,646 

Bureau  of  Animal  Industry,  Weather  Bureau,  and  Agri- 
cultural Investigation 4,536,426 

Interest  on  public  debt 28,556,169 

Postal  service,  including  Post  Office  Department 139,134,510 

Mints  and  assay  offices 1,456,221 

Bureau  of  Engraving  and  Printing 2,782,348 

Public  debt 605,641,539 

Premiums  on  bonds  purchased  and  exchanged 10,907,120 

Internal  revenue  and  customs  rebates  and  other  refunds  16,881,955 

Interest  on  bonds  of  Pacific  railroads 180 

Grants  to  District  of  Columbia 3,415,999 

District  of  Columbia  expenditures  (agency  account)  ..  .  5,168,039 

Soldiers'  Home  permanent  fund  (transfer) 743>Z39 

Miscellaneous 20,923,099 


APPENDIX  A 


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APPENDIX    B 

SELECTED  BIBLIOGRAPHY,  COURSES  OF  READING,  AND 
SUBJECTS  FOR  ESSAYS,  DISCUSSIONS,  AND  DEBATES 

SOME  teachers  of  political  economy  supplement  text-book  work 
by  assigned  reading  chiefly;  others  rely  on  questions,  exercises, 
and  brief  reports  in  connection  with  specific  subjects  taken  up  in 
the  class;  others  again  prefer  that  the  student  write  one  or  two 
longer  essays  for  the  whole  course.  In  this  book  specific  references, 
questions,  and  exercises  have  been  provided  in  connection  with 
each  chapter,  and  in  this  appendix  are  given  subjects  for  the  longer 
essays.  In  most  cases  it  will  be  desirable  to  limit  the  topics  sug- 
gested, and  each  subject  will  suggest  a  number  of  similar  ones. 
Usually  the  teacher  will  desire  to  make  his  own  list  adapted  to  the 
needs  of  his  students,  but  the  list  here  given  will  in  many  cases  be 
of  convenience  where  classes  are  large. 

On  methods  of  teaching  political  economy,  the  following  refer- 
ences will  be  found  of  help:  — 

BULLOCK,  C.  J.     Education,  Vol.  XI,  p.  539. 

CLOW,  F.     Economic  Studies  (American  Economic  Association),  1899. 

DIXON,  F.  H.     School  Review,  January,  1898. 

ELY,  R.  T.     Educational  Review,  Vol.  20,  p.  152. 

HOXIE,  R.  F.     Journal  of  Political  Economy,  Vol.  IX,  p.  481. 

LAUGHLIN,  J.  L.     The  Study  of  Political  Economy,  New  York,  1885;   also 

Journal  of  Political  Economy,  Vol.  9,  p.  384,  and  Atlantic  Monthly, 

May,  1896. 

COMMONS,  J.  R.     The  Inland  Educator,  December,  1895. 
THURSTON,  H.  W.     School  Review,  Vol.  4,  p.  604. 

SUBJECTS    FOR    ESSAYS,    DISCUSSIONS,    AND    DEBATES 
i.  THEORETICAL 

I?  the  Supply  of  Land  Limited  ? 
Is  Abstinence  one  of  the  Costs  of  Production  ? 

685 


686  APPENDIX   B 

Possible  Substitutes  for  Competition. 

One  Hundred  Definitions  of  Capital. 

Can  Mere  Mass  of  Capital  be  the  Basis  of  Monopoly  Power? 

The  Wage-fund  Theory. 

The  Balance  of  Trade  Theory. 

2.   BIOGRAPHICAL  AND  PERSONAL 

John  Law  and  his  Schemes. 

Robert  Owen. 

Rousseau  and  his  Social  Philosophy. 

Sketch  of  the  life  of  Adam  Smith. 

Sketch  of  the  life  of  J.  S.  Mill. 

Richard  Cobden. 

Ferdinand  Lasalle. 

Josiah  Warren. 

Types  of  Modern  Business  Men. 

3.  MONEY 

The  Production  of  Gold  since  1850. 

The  Per  capita  Supply  of  Money  in  the  United  States. 

The  Campaign  of  1896. 

The  Latin  Monetary  Union. 

The  International  Monetary  Conferences. 

Substitutes  for  Gold  as  a  Standard  of  Value. 

Illustrations  of  Gresham's  Law. 

Paper  Money  in  the  Colonies. 

The  Establishment  of  the  United  States  Coinage  System. 

French  Assignats. 

4.   BANKING 

Failures  among  our  National  Banks. 

The  New  York  Safety  Fund  System. 

Insurance  of  Bank  Deposits. 

Branch  Banking. 

Asset  Currency. 

The  Origin  of  our  National  Banking  System. 

The  Control  of  Trust  Companies. 

The  Bank  of  England. 

The  Bank  of  France. 

The  German  Imperial  Bank. 

The  Canadian  Banking  System. 

Usury  and  Usury  Laws. 

Postal  Savings  Banks. 


APPENDIX    H  687 

5.   THE  LABOR  MOVEMENT 


Old  Age  Pensions. 

Compulsory  Arbitration. 

Employers'  Liability  for  Accidents. 

Employment  Offices. 

Shall  the  Boycott  be  Legalized? 

Should  Injunctions  be  prohibited  in  Labor  Disputes? 

Should  Trades  Unions  enter  Politics? 

The  Statistics  of  Strikes. 

The  Trend  of  Wages. 

Insurance  against  Unemployment. 

Employers'  Associations. 

The  Premium  System  of  Wage  Payment. 

Trade  Agreements. 

The  Business  Management  of  the  .  .  .  Union. 

Should  Trades  Unions  Incorporate? 

The  Workingman's  Attitude  toward  Piece  Work. 

The  Present  Status  of  Child  Labor  Legislation. 

The  American  Federation  of  Labor. 

Systems  of  Apprenticeship. 

Industrial  Education. 

Eight-hour  Legislation. 

6.   INSURANCE 

The  Beginnings  of  Insurance  in  England. 

Life  Insurance  in  the  United  States  before  1880. 

Varieties  of  Life  Insurance  Policies. 

Mortality  Tables. 

Joint  Life  Insurance. 

The  Surplus  of  Life  Insurance  Companies. 

Surrender  Values. 

Investments  of  Insurance  Companies. 

Expense  Loading  in  Life  Insurance  Premiums. 

State  Insurance  in  New  Zealand. 

Insurance  Legislation  in  the  State  of  New  York. 

Fraternal  Insurance. 

Industrial  Insurance  in  the  United  States. 

Workmen's  Insurance  in  Germany. 

Employers'  Liability  Insurance. 

Workmen's  Collective  Insurance. 

Rate  Making  in  Fire  Insurance. 

Marine  Insurance. 


688  APPENDIX   B 

7.   TRANSPORTATION 

History  of  the  Erie  Canal. 

Economic  Significance  of  the  Panama  Canal. 

The  Improvement  of  the  Mississippi  River. 

The  Granger  Movement. 

Railroad  Pools. 

Federal  Safety  Appliance  Legislation. 

Financial  History  of  the  .  .  .  Railway  Company. 

Present  Status  of  Railway  Consolidation. 

Methods  of  Railway  Consolidation. 

Uniform  Freight  Classifications. 

Rate-making  Powers  of  State  Railroad  Commissions. 

The  Interstate  Commerce  Act  and  its  Amendments. 

The  Long  and  Short  Haul  Clause. 

The  Basing  Point  System. 

Group  Rates. 

Expense  as  a  Basis  for  Rate  Making. 

The  Northern  Securities  Company. 

8.   CORPORATIONS 

Varieties  of  Stocks  and  Bonds. 

The  Prices  of  the  Stocks  and  Bonds  of  the  .  .  .  Company  since  1900 

Federal  License  or  Federal  Incorporation  ? 

History  of  the  Standard  Oil  Company. 

The  Organization  of  the  United  States  Steel  Corporation. 

The  Control  of  Corporations  in  Massachusetts. 

The  International  Mercantile  Marine  Company. 

The  Basis  of  Capitalization. 

9.  MONOPOLIES  AND  TRUSTS 

Monopolies  in  Ancient  and  Mediaeval  Times. 

Monopolies  in  Seventeenth  Century  England. 

The  History  of  the  Whisky  Trust. 

Control  of  Raw  Material  as  a  Source  of  Monopoly  Power. 

The  Economies  of  Combination. 

Effects  of  Trusts  on  Prices. 

The  Tariff  and  the  Sugar  Trust. 

Trusts  in  England  at  the  Present  Time. 

German  Cartells. 

Patents  as  a  Basis  of  Monopoly  Power. 

The  Telegraph  in  England. 

Concentration  in  Banking. 


APPENDIX   B  689 

10.   INTERNATIONAL  TRADE 

Customs  Duties  in  Colonial  Times. 

The  Dingley  Tariff  Act. 

Customs  Regulations  of  the  Treasury  Department. 

History  of  the  Tariff  on  Wool. 

The  Australian  Tariff  Policy. 

The  Revival  of  Protectionism  in  England. 

The  Tin  Plate  Industry. 

The  Civil  War  and  the  Tariff. 

A  Tariff  Commission. 

Reciprocity. 

Sources  of  our  Leading  Imports. 

The  Destination  of  our  Leading  Exports. 

n.   PUBLIC  FINANCE 

Federal  Income  Taxes. 

Taxation  of  Inheritances  in  the  United  States. 

The  Assessment  of  Real  Estate. 

Franchise  Taxes  in  New  York. 

License  Fees  in  the  Southern  States. 

Taxation  of  Railroads  in  the  United  States. 

The  Taxation  of  Banks. 

The  Taxation  of  Insurance  Companies. 

Mortgage  Taxation. 

Segregation  of  State  and  Local  Revenues. 

Federal  Expenditure  for  Army  and  Navy. 

Our  Pension  System. 

12.   MISCELLANEOUS 

The  Attempt  in  Germany  to  Control  Stock  Exchange  Speculation. 

International  Sugar  Conventions. 

Municipal  Ownership  in  Great  Britain. 

Famines  in  India. 

Development  of  Scientific  Forestry  in  the  Utiited  States. 

Causes  for  the  Decline  in  the  Birth  Rate. 

The  English  Cooperative  Movement. 

Methods  of  Charitable  Relief. 

Future  of  our  Coal  Supply. 

Shipping  Subsidies. 

BIBLIOGRAPHY   AND  COURSES   OF   READING 

The  first  five  books  under  each  division  of  the  bibliography  are 
recommended  as  an  introductory  course  of  study  in  that  particular 


690  APPENDIX   B 

subject.  The  student  should  become  familiar  with  the  apparatus 
which  a  modern  library  provides  for  finding  what  has  been  written 
upon  the  subject  he  is  investigating.  The  card  catalogue  and  the 
cumulative  book  and  periodical  indexes  need  hardly  be  mentioned. 
The  documents  of  the  federal  government  contain  a  vast  amount  of 
important  economic  material.  Thorough  indexes  of  this  material 
have  been  prepared,  and  a  monthly  catalogue  is  issued  by  the 
Superintendent  of  Documents,  at  a  price  of  $1.10  per  year.  An 
index  of  the  economic  material  in  the  documents  of  the  separate 
states  is  being  prepared  under  the  direction  of  the  department  of 
economics  and  sociology  of  the  Carnegie  Institution  of  Washing- 
ton, volumes  for  five  states  having  been  issued  or  put  in  press. 

i.    GENERAL  ECONOMIC  THEORY 

MARSHALL,  ALFRED.     Principles  of  Economics,  5th  ed.,  London  and  New 

York,  1907. 

CARVER,  T.  N.     Distribution  of  Wealth,  New  York,  1904. 
BOHM-BAWERK,  E.  VON.     Positive  Theory  of  Capital  (trans,  by  W.  Smart), 

London,  1891. 

CLARK,  J.  B.     Distribution  of  Wealth,  New  York,  1899. 
DAVENPORT,  H.  J.     Value  and  Distribution,  Chicago,  1908. 
HOBSON,  J.  A.     Economics  of  Distribution,  New  York,  1900. 
HADLEY,  A.  T.     Economics,  New  York,  1897. 
FISHER,  IRVING.      The  Nature  of  Capital  and  Income,  New  York,  1906. 

The  Rate  of  Interest,  New  York,  1907. 
FETTER,  F.  A.     Principles  of  Economics,  New  York,  1904. 
BULLOCK,  C.  J.     Selected  Readings  in  Economics,  Boston,  1907. 
TAUSSIG,  F.  W.     Wages  and  Capital,  New  York,  1896. 
SELIGMAN,  E.  R.  A.     Principles  of  Economics,  3d  ed.,  New  York,  1907. 
SEAGER,  H.  R.     Introduction  to  Economics,  3d  ed.,  New  York,  1905. 
HAWLEY,  F.  B.     Enterprise  and  the  Productive  Process,  New  York,  1907. 

2.    HISTORY  OF  ECONOMIC  THOUGHT 

SMITH,  ADAM.  A  n  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of 
Nations,  edited  by  E.  Cannan,  2  vols.,  London,  1904. 

INGRAM,  J.  K.     History  of  Political  Economy,  2d  ed.,  New  York,  1907. 

RICARDO,  DAVID.  Principles  of  Political  Economy  and  Taxation,  London, 
1817. 

MILL,  J.  S.     Principles  of  Political  Economy,  London,  1848. 

CANNAN,  EDWIN.  History  of  Theories  of  Production  and  Distribution,  2d 
ed.r  London,  1903. 


APPENDIX   B  691 

SENIOR,  NASSAU.     Political  Economy,  London,  1872. 

CAIRNES,  J.  E.     Leading  Principles  of  Political  Economy,  New  York,  1874. 
MALTHUS,  T.  R.     Principles  of  Political  Economy,  ad  ed.,  London,  1836. 
JEVONS,  W.  S.     The  Theory  of  Political  Economy,  London,  3d  ed.,  1888. 
BOHM-BAWERK,  E.  VON.    Capital  and  Interest  (trans,  by  W.  Smart),  London, 

1890.     Recent  Literature  on  Interest  (trans,  by  Scott  and  Feilbogen), 

New  York,  1903. 

CAREY,  H.  C.     Principles  of  Political  Economy,  ad  ed.,  New  York,  1907. 
HIGGS,  HENRY.     The  Physiocrats,  London,  1897. 
SCHMOLLER,  GUSTAV.     The  Mercantile  System  (trans,  by  W.  J.  Ashley),  New 

York,  1896. 
GEORGE,  HENRY.     Progress  and  Poverty  (4th  ed.,  1880),  reprinted  New  York, 

1904. 

3.    ECONOMIC  HISTORY 

BOG  ART,  ERNEST  L.   Economic  History  of  the  United  States,  New  York,  1908. 
COMAN,  KATHERINE.     The  Industrial  History  of  the  United  States,  New 

York,  1905. 
CUNNINGHAM,  WILLIAM.   Growth  of  English  Industry  and  Commerce,  3  vols., 

Cambridge,  1903  and  1905. 

TURNER,  F.  J.     Rise  of  the  New  West,  New  York,  1906. 
UNWIN,  GEORGE.     Industrial  Organization  in  the  i6th  and  ijth  Centuries, 

Oxford,  1904. 
WEEDEN,  VV.  B.     Economic  and  Social  History  of  New  England,  Boston  and 

New  York,  1891. 

BRUCE,  P.  H.     Economic  History  of  Virginia,  2  vols.,  New  York,  1896. 
SELIGMAN,  E.  R.  A.     The  Economic  Interpretation  of  History,  New  York, 

1902. 

DAY,  CLIVE.     History  of  Commerce,  New  York,  1908. 
BUCHER,  C.     Industrial  Evolution  (trans,  by  S.  M.  Wickett),  New  York, 

1901. 

HOBSON,  J.  A.     Evolution  of  Modern  Capitalism,  2d  ed.,  New  York,  1908. 
ASHLEY,  W.  J.     English  Economic  History,  2  vols.,  New  York,  1893  and 

1894. 

4.    THE  LABOR  MOVEMENT 

ADAMS,  T.  S.,  and  SUMNER,  H.  L.     Labor  Problems,  New  York,  1905. 

WEBB,  SIDNEY  and  BEATRICE.  Industrial  Democracy,  2d  ed.,  London, 
New  York,  and  Bombay,  1902. 

HOLLANDER,  J.  H.,  and  BARNETT,  G.  E.  Studies  in  American  Trade  Union- 
ism, New  York,  1906. 

COMMONS,  J.  R.     Trade  Unionism  and  Labor  Problems,  Boston,  1905. 

HUTCHINS,  B.  L.,  and  HARRISON,  A.  A  History  of  Factory  Legislation, 
2d  ed.,  London,  1907. 

CLARK,  VICTOR  S.     The  Labor  Movement  in  Australia,  New  York,  1906. 


692  APPENDIX   B 

KELLEY,  FLORENCE.     Some  Ethical  Gains  through  Legislation,  New  York, 

1905. 

BOOTH,  CHARLES.     Old  Age  Pensions  and  the  Aged  Poor,  London,  1907. 
ROBERTS,  PETER.     Anthracite  Coal  Communities,  New  York,  1904. 
BUCHANAN,  J.  R.     The  Story  of  a  Labor  Agitator,  New  York,  1903. 
MORE,  L.  B.     Wage-Earner's  Budgets,  New  York,  1907. 

5.    PLANS  FOR  SOCIAL  REFORM 

ELY,  R.  T.     Socialism  and  Social  Reform,  New  York,  1905. 

KIRKUP,  THOMAS.     History  of  Socialism,  ad  ed.,  London,  1900. 

ENSOR,  R.  C.  K.      Modern  Socialism,  London,  1907. 

ELTZBACHER,   PAUL.     Anarchism   (trans,   by  S.  T.   Byington),    London, 

1908. 

JAURES,  J.  L.    Studies  in  Socialism  (trans,  by  M.  Minturn),  New  York,  1906. 
PODMORE,  FRANK.     The  Life  of  Robert  Owen,  2  vols.,  London,  1907. 
BROOKS,  J.  G.     The  Social  Unrest,  New  York,  1903. 
MARX,  KARL.     Capital  (trans,  by  E.  Unterman),  3  vols.,  Chicago,  1906. 
MARX,  KARL,  and  FRIEDRICH  ENGELS.     The  Communist  Manifesto,  many 

editions. 

HUNTER,  ROBERT.     Socialists  at  Work,  New  York,  1908. 
HOLYOAKE,  G.  J.     History  of  Cooperation,  new  ed.,  2  vols.,  New  York, 

1906. 

6.    CORPORATIONS,  MONOPOLIES,  AND  TRUSTS 

MEADE,  E.  S.     Trust  Finance,  New  York,  1903. 

RIPLEY,  W.  Z.     Trusts,  Pools,  and  Corporations,  Boston,  1905. 

ELY,  R.  T.     Monopolies  and  Trusts,  New  York,  1900. 

HIRST,  F.  W.     Monopolies,  Trusts,  and  Cartells,  London,  1905. 

TARBELL,  IDA  M.     History  of  the  Standard  Oil  Company,  New  York,  1904. 

CLARK,  J.  B.     The  Problem  of  Monopoly,  New  York,  1904. 

PRICE,  W.  H.     English  Patents  of  Monopoly,  Boston,  1906. 

Bureau    of    Corporations,   Report    on    the    Petroleum    Industry,     2    vols., 

Washington,  1907  and  1908. 

MEYER,  H.  R.     Municipal  Ownership  in  Great  Britain,  New  York,  1906. 
HOWE,  F.  C.     The  British  City,  New  York,  1907. 
VEBLEN,  T.  B.     The  Theory  of  Business  Enterprise,  New  York,  1904. 

7.    TRANSPORTATION 

JOHNSON,  E.  R.  American  Railway  Transportation,  2d  ed.,  New  York, 
1905.  Ocean  and  Inland  Water  Transportation,  New  York,  1906. 

RIPLEY,  W.  Z.     Railway  Problems,  Boston,  1907. 

BEALE,  J.  H.  B.,  and  WYMAN,  B.  Law  of  Railroad  Rate  Regulation,  Boston, 
1906. 


APPENDIX    B  693 

"  American  Waterways."     A  nnals  of  the  American  Academy  of  Political  and 

Social  Science,  January,  1908. 

ACWORTH,  WILLIAM.     Elements  of  Railway  Economics,  Oxford,  1905. 
PHILLIPS,  U.  B.     History  of  Transportation   in  the  Eastern  Cotton  Belt, 

New  York,  1908. 

MERRITT,  A.  N.     Federal  Regulation  of  Railway  Rates,  Boston,  1907. 
MEEKER,  R.     History  of  Shipping  Subsidies,  New  York,  1905. 
NOYES,  W.  C.     American  Railroad  Rales,  Boston,  1905. 
WTEBB,  W.  L.     Economics  of  Railroad  Construction,  New  York,  1906. 

8.    INTERNATIONAL  TRADE 

FISK,  G.  M.     International  Commercial  Policies,  New  York,  1907. 
TAUSSIG,  F.  W.     Tariff  History  of  the  United  States,  sth  ed.,  New  York, 

1903. 

BASTABLE,  C.  F.     Theory  of  International  Trade,  London,  1897. 
SMART,  WILLIAM.     Return  to  Protection,  2d  ed.,  London,  1906. 
CLARE,  GEORGE.     The  A  B  C  of  the  Foreign  Exchanges,  London,  1895. 
MARGRAFF,  A.  W.     International  Exchange,  ad  ed.,  Chicago,  1904. 
BOWLEY,  A.  L.     England's  Foreign  Trade  in  the  Nineteenth  Century,  2d 

ed.,  London,  1905. 
STANWOOD,   EDWARD.     American   Tariff  Controversies  in  the  Nineteenth 

Century,  2  vols.,  Boston,  1903. 
HOBSON,  J.  A.     International  Trade,  London,  1904. 
FUCHS,  K.  J.     The  Trade  Policy  of  Great  Britain  and  Her  Colonies  since 

1860  (trans,  by  Archibald),  London,  1905. 
ROOT,  J.  W.  Colonial  Tariffs,  Liverpool,  1006. 
CUNNINGHAM,  WILLIAM.  The  Free  Trade  Movement,  2d  ed.,  Cambridge, 

1905. 

9.    INSURANCE 

DAWSON,  M.  M.     Elements  of  Life  Insurance,  2d  ed.,  New  York,  1902.    The 

Business  Side  of  Life  Insurance,  New  York,  1905. 
MOIR,  HENRY.     Life  Assurance  Primer,  New  York,  1904. 
KITCHIN,  F.  H.     Principles  and  Finance  of  Fire  Insurance,  London,  1904. 
Yale  Insurance  Lectures,  New  Haven,  2  vols.,  1904. 
Gow,  WILLIAM.     Marine  Insurance,  London,  1900. 
Institutes  of  Actuaries  Text-book,  2  vols.,  2d  ed.,  London,  1902. 
WTAMBAUGH,  EUGENE.     Cases  on  Insurance,  Cambridge,  1902. 
Annals  of  the  American  Academy  of  Political  and  Social  Science,  special 

volume  on  Insurance,  Philadelphia,  Vol.  26,  1905. 
"Q.  P."     How  to  buy  Life  Insurance,  New  York,  1906. 
New  York  Legislative  Investigating  Committee,  7  vols.,  1905. 


694  APPENDIX   B 

10.    MONEY  AND  BANKING 

SCOTT,  W.  A.     Money  and  Banking,  2d  ed.,  New  York,  1908. 

HULL,  W.  H.     Practical  Problems  in  Banking  and  Commerce,  New  York, 

1907. 

EASTON,  H.  T.     Money,  Exchange,  and  Banking,  London,  1905. 
LAUGHLIN,  J.  L.     Principles  of  Money,  Chicago,  1903. 
JOHNSON,  J.  F.     Money  and  Currency,  Boston,  1906. 
KINLEY,  DAVID.     Money,  New  York,  1904. 
WHITE,  HORACE.     Money  and  Banking,  New  York,  1902. 
SHAW,  W.  A.     History  of  the  Currency,  3d  ed.,  New  York,  1896. 
CLEVELAND,  F.  A.     The  Bank  and  the  Treasury,  New  York,  1905. 
CONANT,  C.  A.     Modern  Banks  of  Issue,  ad  ed.,  New  York,  1896. 
WILLIS,  H.  P.     A  History  of  the  Latin  Monetary  Union,  Chicago,  1901. 
RUSSELL,  H.  B.     International  Monetary  Conferences,  New  York,  1898. 

ii.    AGRICULTURAL  ECONOMICS 

TAYLOR,  H.  C.     Introduction  to  the  Study  of  Agricultural  Economics,  New 

York,  1905. 

COLLIN.     The  New  Agriculture,  New  York,  1907. 
PRICHARD,  NEWELL,  and  PINCHOT.     Report  of  Public  Land  Commission, 

Washington. 

HAGGARD,  H.  R.     Rural  England,  z  vols.,  New  York,  1902. 
ROGERS,  A.  G.  L.     The  Business  Side  of  Agriculture,  London,  1004. 
HIBBARD,    B.    H.     History  of  Agriculture  in   Dane   County,    Wisconsin, 

Madison,   1904. 
Census  Reports. 

Publications  of  the  United  States  Department  of  Agriculture. 
BRIGHT,  JOHN.     The  Agricultural  Valuer's  Assistant,  London,  1901. 
HALL,  BOLTON.     Three  Acres  and  Liberty,  New  York,  1907. 

12.    STATISTICS 

BOWLEY,  A.  L.     Elements  of  Statistics,  2d  ed.,  London,  1902. 

MAYO  SMITH,  RICHMOND.    Statistics  and  Economics,   New  York,    1899; 

Statistics  and  Sociology,  New  York,   1895. 
NEWSHOLME,  ARTHUR.     Vital  Statistics,  3d  ed.,  London,  1899. 
THORNDIKE,  E.  L.     An  Introduction  to  the  Theory  of  Mental  and  Social 

Measurements,  New  York,  1904. 
BAILEY,  W.  B.     Modern  Social  Conditions,  New  York,  1906. 

13.    MATHEMATICAL  ECONOMICS 

FISHER,  IRVING.     Brief  Introduction  to  Infinitesimal  Calculus,  3d  ed.,  New 
York,  1906. 


APPENDIX   B  695 

COURNOT,  A.  A.  Mathematical  Principles  of  the  Theory  of  Wealth,  trans, 
by  N.  T.  Bacon,  with  a  bibliography  of  Mathematical  Economics  by 
Irving  Fisher,  New  York,  1897. 

14.    PUBLIC  FINANCE 

ADAMS,  H.  C.     The  Science  of  Finance,  New  York,  1809. 

BASTABLE,  C.  F.     Public  Finance,  2d  ed.,  London,  1895. 

SELIGMAN,  E.  R.  A.  Essays  in  Taxation,  New  York,  3d  ed.,  New  York, 
1000.  The  Shifting  and  Incidence  of  Taxation,  New  York,  2d  ed., 
New  York,  1899. 

DEWEY,  D.  R.     Financial  History  of  the  United  States,  New  York,  1903. 

BULLOCK,  C.  J.     Selected  Readings  in  Public  Finance,  Boston,  1906. 

COOLEY,  T.  M.     A  Treatise  on  the  Law  of  Taxation,  3d  ed.,  188. 

ELY,  R.  T.     Taxation  in  American  States  and  Cities,  New  York,  1888. 

SELIGMAN,  E.  R.  A.  Progressive  Taxation  in  Theory  and  Practice,  Balti- 
more, 1894. 

ADAMS,  H.  C.    Public  Debts,  New  York,  1890. 

SCOTT,  W.  A.     The  Repudiation  of  State  Debts,  New  York,  1893. 

Twelfth  Census  Reports  on  Wealth,  Debt,  and  Taxation. 

15.    ECONOMIC  GEOGRAPHY 

TROTTER,  The  Geography  of  Commerce,  New  York,  1903. 
DAY,  CLIVE.     The  History  of  Commerce,  New  York,  1908. 
REDWAY,  J.  W.     Commercial  Geography,  New  York,  1903. 
ADAMS,  C.  C.     A  Text-book  of  Commercial  Geography,  New  York,  1901. 
CHISHOLM,  G.  G.     A  Handbook  of  Commercial  Geography,  4th  ed.,  New 
York,  1903. 

16.    DICTIONARIES  AND  REFERENCE  BOOKS 

PALGRAVE,  H.  I.     Dictionary  of  Political  Economy. 

BLISS,  W.  D.  P.     Encyclopedia  of  Social  Reform  (zd  ed.). 

LALOR,   J.  J.     Encyclopedia  of  Political  Science,   Political  Economy,  and 

United  States  History. 
New  International  Encyclopcedia.. 
Statistical  Abstract  of  the  United  States. 
Social  Progress:  A  Year  Book  (edited  by  J.  Strong). 

PERIODICALS 

Quarterly  Journal  of  Economics  (Boston). 

Journal  of  Political  Economy  (Chicago). 

Yale  Review  (New  Haven). 

Publications  and  Bulletin  of  the  American  Economic  Association. 

The  Economic  Journal  (London). 

Journal  of  the  Royal  Statistical  Society  (London). 

Quarterly  Publications  of  the  American  Statistical  Association. 


INDEX 


Abstinence,  96.     See  Waiting. 
Agriculture,   development,    37,   46,    75; 

problems,  528;   stage,  33. 
Aldrich  Act,  1908,  261. 
American  people,  characteristics,  58. 
Amortization  of  taxes,  621. 
Anarchism,  525. 
Anti-trust  Act,  88,  153. 
Arbitration,  402  et  seq. 
Asset  banking,  261. 
Authority,  27. 
Averages,  273. 

B 

Balance  of  trade,  288. 
Balance  sheet,  137. 
Banking,  247  et  seq. 
Bargaining,  177,  446. 
Benevolence,  27. 
Bimetallism,  225. 
Birth  rate,  60. 
Bland- Allison  Act,  231. 
Bonds,  144. 
Biicher's  stages,  39. 
Budget  of  France,  568-570. 
Business  organization,  136. 
Business  taxes,  648. 


Call  loans,  247,  255. 
Capital,  100,  123,  416  et  seq. 
Capitalization,  144,  146,  359,  621. 
Central  bank,  262. 
Chance  gains,  445. 
Cities,  migration  to,  61. 


Clark,  J.  B.,  325  (note). 

Clearing  house,  244,  245. 

Closed  shop,  391. 

Coinage,  117. 

Collective  bargaining,  84,  390,  402. 

Common  field  system,  34,  43. 

Comparative  costs,  285,  305,  306. 

Competition,  24,  49,  78,  88,  159,  203 

467,  473.  5°i- 

Compulsory  arbitration,  404. 
Concentration  of  wealth,  335. 
Constant  expenditure,  175. 
Consumer,  the,  467. 
Consumption,  106,  117,  434. 
Contract,  21,  317,  466. 
Cooperation,  26,  409,  545. 
Copyright,  463. 
Corporations,  140,  645. 
Cost  of  production,  125. 
Credit,  243,  538. 
Crises,  267. 
Custom,  27. 
Customs  duties,  627. 


Debts,  public,  582. 

Decreasing  expenses,  175. 

Deferred  payment,  standard  of,  871. 

Demand,  160,  162. 

Diminishing  productivity,  319,  326. 

Diminishing  utility,  107. 

Direct  appropriation.  30. 

Discount,  247. 

Distribution   of   wealth,  see  Contents; 

ideal,  114;   and  monopoly,  208. 
Diversification  of  industry,  302. 
Dividend,  national,  104. 


697 


698 


INDEX 


Division  of  labor,  18,  127-131. 
Domain,  public,  586. 
Domestic  system,  36. 
Dumping,  303. 


Economics  denned,  3. 

Economic  classes,  19. 

Economic  goods,  95. 

Economic  laws,  7. 

Economic  stages,  29,  40,  56. 

Economic  thought,  657. 

Education  of  farmers,  548. 

Effort,  96. 

Efficiency  and  wages,  382. 

Elastic  currency,  260. 

Elasticity  of  demand,  163,  369. 

Employers'  associations,  85,  400. 

Engel's  law,  117. 

England  in  1760,  42. 

Entrepreneur,  126,  138,  440. 

Equality,  114. 

Error,  normal  law  of,  382. 

Ethical  level  of  competition,  467. 

Expenditures,  public,  555. 

Expense,    decreasing    and    increasing, 

i7S- 
Expense  of  production,  125,  173. 


Factors  of  production,  122. 

Factory  system,  47. 

Family  budgets,  118,  119. 

Farms,  size  of,  327,  528. 

Federal   control   of   corporations,    154, 

494- 

Fees,  606. 
Fiat  money,  241. 
Forest  lands,  469,  589, 
Foreign  exchange,  292. 
Franchises,  506. 
Freedom,  23,  317,  523. 
Free  goods,  95. 


Free  silver,  230. 
Free  trade,  305. 
Fundamental  institutions,  16,  460. 


George,  Henry,  364,  595. 

Gilds,  35-36. 

Gold,  234,  279,  296. 

Government  ownership,  480,  503,  597, 

See  also  State  activity. 
Greenbacks,  236. 

H 

Handicraft  stage,  35. 
Hoe  culture,  30. 
Home  market,  302,  307. 
Home  rule,  municipal,  512. 
Hours  of  labor,  340. 
Hypothecation,  246. 


Immaterial  goods,  97. 

Immigration,  62. 

Income,  98,  104. 

Income  tax,  634. 

Independent  treasury,  257. 

Index  numbers,  272. 

Individual  standpoint,  98,  101. 

Industrial  democracy,  408. 

Industrial  revolution,  42,  47,  72. 

Industrial  stage,  39. 

Infant  industries,  300. 

Inheritance,  21,  317,  466. 

Inheritance  tax,  637. 

Insurance,  485. 

Intensive  margin,  354. 

Interest,  415  et  seq. 

Internal  revenue,  631. 

International  trade,  284. 

Interstate  Commerce  Commission,  483. 

Interstate  commerce,  taxation,  650. 

Investment  of  capital,  422. 


INDEX 


699 


Joint  expenses,  177. 
Justice  in  taxation,  612. 


Labor,  factor  in  production,  122. 

Labor  legislation,  51. 

Labor  movement,  83. 

Labor  organizations,  53,  387. 

Labor,  supply  of,  371. 

Laissez-faire,  49,  87. 

Land,  122,  349,  357. 

Land  nationalization,  595. 

Land  policy  of  U.  S.,  587. 

Liberty,  55.     See  Freedom. 

License  taxes,  648. 

Localization  of  industry,  131,  302. 

Luxury,  1 13. 

M 

Machinery  and  labor,  129,  369. 
Malthusian  theory,  361,  374,  665. 
Manorial  economy,  34. 
Manufacturers,    in   America,    76;    size 

of  establishment,  79;   integration,  80. 
Marginal  expense,  173;  land,  353,  356; 

product,  321,  331,  368. 
Markets,  24,  48,  158,  543. 
Mechanical  inventions,   44- 
Mercantilism,  37,  70,  287. 
Mineral  lands,  591 . 
Money,  214  et  seq. 
Monopoly,  26,  38,  179,  187,  310,  342, 

390,  50°.  5°3- 

Motives  in  economic  activity,  93. 
Municipalities,  economic  activity,  496, 

5°7- 
Mutual  dependence,   19. 


N 


National  banks,  251. 


Nationalism,  300. 
Navigation  acts,  71. 
Needs  and  distribution,  1 1 4. 
Negro  problem,  61. 
Non-reproducible  goods,  178. 
Normal  value,  170. 


Occupation,  132,  379. 

Organization  of  factors,  126,  321,  328. 

Overcapitalization,  144. 


Paper  money,  234,  250. 

Partnerships,  139. 

Pastoral  stage,  32. 

Patents,  462. 

Personal  distribution  of  wealth,  335. 

Poll  tax,  649. 

Population,  59,  373.    See    Malthusian 

theory. 

Price,  market,  167;  statistics,  240,  340. 
Primitive  man,  31. 
Private  enterprise,  16. 
Production,  121. 
Productivity,  114,  319,  329,  418. 
Profits,  439  **  seQ- 
Profit  sharing,  406. 
Progressive  taxation,  616. 
Property,  20,  317,  461- 
Property  tax,  640. 
Protection,  86,  87,  300. 
Prussia,  incomes  in,  338. 
Public  authority  and  value,  180. 
Public  expenditures,  law  of,  562. 
Public  finance,  555  et  seq. 
Public  industries,  597. 
Public  ownership,  503. 
Public  revenues,  580  et  seq. 
Public    utilities,    in    cities,    see    Chap. 

XXIX. 
Publicity,  153. 


700 


INDEX 


Quality  of  goods,  50,  87. 


R 

Race  suicide,  60. 

Railways,  80,  471  et  seq. 

Rent,  348  et  seq. 

Resources  of  United  States,  66. 

Retail  price,  179. 

Riches,  341. 

Risk,  442. 


Sacrifice,  124. 

Saving,  113,  123,  420. 

Sectionalism,  57. 

Segregation  of  revenues,  651. 

Seigniorage,  217. 

Services,  96. 

Sherman  Act  of  1890,  231. 

Shifting  of  taxes,  619. 

Slavery,  33,  61. 

Smith,  Adam,  43,  315,  380,  664. 

Social  dividend,  448. 

Socialism,  515  et  seq. 

Social  reform,  345,  523. 

Special  asesssments,  608. 

Speculation,  255,  441,  546. 

Standard  of  life,  377. 

Standard  of  value,  221. 

State  activity,  16,  54,  86,  458,  597. 

Stocks,  forms  of,  143. 

Strikes,  395-397. 

Subsistence  theory  of  wages,  376. 


Supply,  160,  166,   167,  17$ 


Tabular  standard,  274. 
Taxation,  200,  610,  625. 
Tenancy,  533,  540. 
Trade  marks,  463. 
Trade  restrictions,  286. 
Trade  unions,  Chap.  XXIII. 
Transportation,  80,  471  et  seq, 
Trust  companies,  264. 
Trusts,  150,  211. 

U 

Undertaker,  126. 
Unearned  increment,  363. 
United  States  Bank,  263. 
Usury,  438. 
Utility,  95,  107,  108. 
Urban  land,  365. 


Value,   156,   170,   181  et  seq.,  270,  275 
Variable  expenses,  175,  176,  199. 
Vested  rights,  22. 
Village  communities,  33. 

W 

Wages,   240,   304,   307,   340,  367,  381, 

537- 

Waiting,  96,  420. 
Wants,  107,  in. 
Wealth,  98,  99,  101,  102,  335. 


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